International Hi-Tech Industries Inc. v. The Queen

International Hi-Tech Industries Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2018-12-10
Neutral citation
2018 TCC 240
File numbers
2013-1150(GST)G
Judges and Taxing Officers
Don R. Sommerfeldt
Subjects
Part IX of the Excise Tax Act (GST)
Notes
Corrected document added 17/12/2018
Decision Content
Docket: 2013-1150(GST)G
BETWEEN:
INTERNATIONAL HI-TECH INDUSTRIES INC.
by its Secured Creditors, Receivers in part and Lawful Attorneys,
IHI INTERNATIONAL HOLDINGS LTD., GARMECO INTERNATIONAL CONSULTING ENGINEERS S.A.L., GARMECO CANADA INTERNATIONAL CONSULTING ENGINEERS LTD., IHI HOLDINGS LTD. AND
EARTHQUAKE RESISTANCE STRUCTURES INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on November 28 to 30, 2017, at Vancouver,
British Columbia. Submissions filed by the Appellant on January 3, 2018 and by the Respondent on January 5, 2018.
By: The Honourable Justice Don R. Sommerfeldt
Appearances:
Counsel for the Appellant:
Andrew G. Sandilands
Counsel for the Respondent:
Matthew W. Turnell
Jamie Hansen
AMENDED JUDGMENT
These Appeals are allowed, and the reassessments that are the subject of these Appeals are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that, as conceded by the Respondent, the Appellant is entitled to succeed to the extent of $19,200.77, as explained in more detail in the attached Reasons.
If the Parties are unable to agree on costs, they may file written submissions in respect of costs, each submission to be no longer than five pages, within 90 days of this Judgment.
This Amended Judgment is issued in substitution of the Judgment dated November 30, 2018.
Signed at Ottawa, Canada, this 10th day of December 2018.
“Don R. Sommerfeldt”
Sommerfeldt J.
Citation: 2018 TCC 240
Date: 20181130
Docket: 2013-1150(GST)G
BETWEEN:
INTERNATIONAL HI-TECH INDUSTRIES INC.
by its Secured Creditors, Receivers in part and Lawful Attorneys,
IHI INTERNATIONAL HOLDINGS LTD., GARMECO INTERNATIONAL CONSULTING ENGINEERS S.A.L., GARMECO CANADA INTERNATIONAL CONSULTING ENGINEERS LTD., IHI HOLDINGS LTD. AND
EARTHQUAKE RESISTANCE STRUCTURES INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sommerfeldt J.
I. INTRODUCTION [1] These Reasons pertain to the Appeals instituted by International Hi-Tech Industries Inc. (“IHI”) (as represented by its secured creditors, receivers in part and lawful attorneys, being Garmeco International Consulting Engineers S.A.L., Garmeco Canada International Consulting Engineers Ltd., IHI Holdings Ltd., and Earthquake Resistance Structures Inc. (collectively, the “Garmeco Group”))[1] against certain reassessments (the “Reassessments”) issued by the Canada Revenue Agency (the “CRA”) on behalf of the Minister of National Revenue (the “Minister”) in respect of most of the quarterly reporting periods in 2006 and 2007, as follows:
Reporting Period
Abbreviation
Adjustment
2006/01/01 to 2006/03/31
Q1-06
$23,288.26
2006/07/01 to 2006/09/30
Q3-06
11,012.50 Cr
2006/10/01 to 2006/12/31
Q4-06
22,869.62
2007/01/01 to 2007/03/31
Q1-07
50,771.16
2007/04/01 to 2007/06/30
Q2-07
2,643.85
2007/07/01 to 2007/09/30
Q3-07
20,168.41
2007/10/01 to 2007/12/31
Q4-07
29,030.93
Total
$137,759.73
[2] On January 14, 2011, the CRA issued to IHI a ten-page reassessing document.[2] The first page of that document is entitled “Notice of (Re)Assessment,” and contains the statement, “This notice explains the results of our audit (re)assessment of return(s) you have or may have previously filed.” This suggests that there may have been only one composite reassessment for all seven quarterly reporting periods. However, each of pages 2 through 8 of that document also contains the title “Notice of (Re)assessment” and each has a different seventeen-digit reference number, suggesting that each of those pages represents a separate reassessment, corresponding to the seven reporting periods in issue. If there was a single reassessment, these proceedings presumably constitute only one Appeal. However, if there were seven reassessments, the Notice of Appeal filed by IHI represents multiple Appeals.[3] Without reaching a definitive conclusion, I will simply assume that there were multiple Reassessments and that there are multiple Appeals.
II. ISSUES [3] The issues in these Appeals are:
a) When IHI sold certain land in Q1-06, was IHI required to collect the goods and services tax (the “GST”) from the purchaser?
b) Was IHI entitled to claim input tax credits (“ITCs”) in respect of consideration paid by IHI to its patent agent for legal services, filing fees and related expenses?
c) Was IHI entitled to claim ITCs in respect of three payments made to its accountants in Q3-07 and Q4-07?
d) Was IHI entitled to claim ITCs in respect of two payments, made pursuant to two letters of credit, to Canadian Natural Resources Limited (“CNRL”) in Q2-07?
e) Was IHI entitled to claim ITCs in respect of various payments made to its lawyers in Q3-07 to the extent that those payments exceeded the amount of the ITCs conceded by the Crown?
III. FACTUAL BACKGROUND [4] During the reporting periods that are the subject of these Appeals, IHI was a public corporation, whose President and Chief Executive Officer was Roger Abou-Rached. Little evidence was provided concerning the ownership of IHI; however, it seems that the most significant shareholder of IHI at that time was the mother of Mr. Abou-Rached and that other members of his family also owned shares of IHI. While there was little evidence concerning the leadership of IHI, it appears that, in addition to Mr. Abou-Rached, other members of his family also held positions of responsibility in IHI.[4]
[5] The business of IHI included the construction of buildings using completely manufactured prefabricated panels made of special reinforced concrete, rigid foam and cold-formed metals. Robotic machinery was used to manufacture the panels. It appears that the robotic machinery did not always operate as intended in 2006 and 2007.
IV. CONCESSIONS AND ADMISSIONS A. Concessions by the Crown [6] During the opening statement made by counsel for the Crown, he indicated that IHI had provided documentation to support its claims for ITCs in respect of amounts paid to a law firm, Steele Urquhart, for legal services. As well, the Crown acknowledges that the amount assessed by it as additional GST collectible for Q4-07 should be $12,653.14, rather than $25,289.20. In other words, the Notice of Reassessment for Q4-07 was excessive to the extent of $12,736.06 (i.e., $25,289.20 − $12,653.14). Consequently, the Crown concedes that IHI is entitled to succeed to the extent of the following amounts:
Period
Description
Amount
Q1-07
ITCs re: payments to Steele Urquhart
$801.47
Q2-07
ITCs re: payments to Steele Urquhart
4,158.48
Q3-07
ITCs re: payments to Steele Urquhart
1,504.86
Q4-07
Reduction in GST collectible
12,736.06
Total
$19,200.77
Thus, the Crown acknowledges that IHI is entitled to succeed in these Appeals to the extent of $19,200.77.[5]
[7] In respect of Q3-07, IHI claimed ITCs in the aggregate amount of $2,126.10. The ITCs conceded by the Crown for Q3-07 (i.e., $1,504.86) represent the amount for which proper supporting documentation was ultimately provided by IHI. As the Crown is of the view that IHI has not provided proper supporting documentation in respect of the remaining ITCs in Q3-07 (i.e., $621.24), those ITCs are still in issue.
B. Admissions by IHI [8] On September 25, 2017, pursuant to subsection 130(1) of the Rules, counsel for the Crown served on counsel for IHI a Request to Admit, a copy of which is attached as Schedule A. IHI did not respond to the Request to Admit within the fifteen-day period contemplated by subsection 131(1) of the Rules, with the result that, by reason of subsection 131(2) of the Rules, IHI is deemed, for the purposes of these Appeals, to admit the truth of the facts and the authenticity of the documents mentioned in the Request to Admit. IHI has not subsequently withdrawn the deemed admission.[6]
V. ANALYSIS A. Sale of Lots
(1) Background [9] In 1996, IHI acquired two vacant parcels of land, located in Langley, British Columbia, and civically described as Lot 1 Fraser Hwy, Langley, BC, PID 003-772-560 (“Lot 1”) and Lot 2 Fraser Hwy, Langley, BC, PID 003-774-074 (“Lot 2” ). Lot 1 and Lot 2 (together, the “Lots”) were acquired by IHI to accommodate the then owner of the Lots, who was a friend of a significant shareholder of IHI and who was willing to receive shares of IHI as consideration for the sale of the Lots. The Lots were not located conveniently close to the business premises of IHI and were not required to carry on that business.
[10] When IHI acquired the Lots, no GST was exigible, as the vendor was an individual and the supply of the Lots apparently came within section 9 of Part I of Schedule V to the ETA.
[11] On March 30, 2006, IHI sold the Lots for an aggregate price of $240,000 (being $130,000 for Lot 1 and $110,000 for Lot 2). As a cost-saving measure, IHI used a notary public, rather than a lawyer, to document and implement the sale transaction, as did the purchaser (the “Purchaser”), who was an individual and who was not a registrant for the purposes of the ETA. Apparently, the notary acting for the Purchaser was of the understanding that the exemption in section 9 of Part I of Schedule V to the ETA applied to corporations, as well as to individuals and personal trusts. It seems that the notary acting for IHI held a similar view. Mr. Abou-Rached testified that, because no GST had been payable by IHI when it acquired the Lots in 1996, he assumed that no GST would be exigible when IHI sold the Lots in 2006. In any event, the notary for the Purchaser provided two documents, each entitled “Goods & Services Tax Certificate,” which indicated that the sale of the Lots was an exempt supply. The operative portion of each certificate stated, “The above sale is exempt from GST because it is … [a] sale of personal-use land by an individual or Trust or Company that is a sale not in the course of business.”[7] The notary acting for IHI reviewed those certificates and apparently approved them, and Mr. Abou-Rached signed them on behalf of IHI.
[12] As Mr. Abou-Rached (on behalf of IHI) and the Purchaser, as well as their respective notaries, were of the understanding that the sale of the Lots was an exempt supply, no GST was collected by IHI.
[13] When the CRA audited IHI in respect of 2006 and 2007, the auditor realized that no GST had been collected in respect of the sale of the Lots, with the result that the Reassessment for Q1-06 assessed GST in the amount of $9,100 in respect of the supply of Lot 1 and $7,700 in respect of the supply of Lot 2.
(2) Statutory Provision and Analysis [14] In support of its submission that the sale of the Lots was an exempt supply, IHI is relying on subsection 9(2) of Part I of Schedule V to the ETA. The Notice of Appeal states that the Lots were acquired as capital property but were never used, nor intended to be used, in the business of IHI. Thus, it appears that the Appellant was most concerned about showing that the sale of the Lots did not come within paragraphs V-I-9(2)(a) and (b) of the ETA.
[15] The difficulty faced by the Appellant is that the opening portion of subsection 9(2) of Part I of Schedule V to the ETA reads as follows:
A supply of real property made by way of sale by an individual or a personal trust, other than….
IHI is a corporation, and not an individual or a personal trust. As noted above, the Goods & Services Tax Certificates signed by Mr. Abou-Rached on behalf of IHI incorrectly suggested that an exempt supply may occur where there is a sale of personal-use land by an individual, trust or company otherwise than in the course of a business. However, the wording of those certificates did not conform with the wording of the statutory exemption. An incorrectly drafted certificate cannot create an exempt supply that does not come within the wording of the applicable legislation. Therefore, the exemption in subsection V-I-9(2) of the ETA is not available.
[16] I am not aware of any provision in Schedule V to the ETA that would result in the sale of the Lots being an exempt supply, nor did IHI refer me to any provision other than subsection V-I-9(2).
[17] As the sale of the Lots was a taxable supply, IHI was required, pursuant to subsection 221(1) of the ETA, to collect the GST payable by the Purchaser in respect of that supply. The exceptions set out in subsection 221(2) of the ETA were not available, given that:
a)IHI was a resident of Canada by reason of paragraph 132(1)(a) of the ETA, and not by reason only of subsection 132(2) of the ETA;
b)the Purchaser was not registered under Subdivision d of Division V of Part IX of the ETA;
c)IHI and the Purchaser did not make an election under section 2 of Part I of Schedule V to the ETA; and
d)the Purchaser was not a prescribed recipient.
Accordingly, IHI was required to collect GST in the amount of $16,800 from the Purchaser.
B. Payments to Patent Agent (1) Background [18] In the 1990s or thereabouts, Mr. Abou-Rached, while employed by Garmeco International Consulting Engineers S.A.L., developed certain technology (the “Technology”) relating to a building construction process using completely manufactured prefabricated panels made of special reinforced concrete, rigid foam and cold-formed metals. Ultimately, pursuant to one or more transfers, all rights to the Technology were acquired by R.A.R. Consultants Ltd. (“RAR”), which was a corporation initially owned by Mr. Abou-Rached, but subsequently owned directly or indirectly by other members of his family.
[19] RAR applied for and acquired various patents around the world. Mr. Abou-Rached testified that the Technology included eight inventions and seventy-two patents, which were registered in 180 countries and 115 languages. In 2006 and 2007, IHI held a licence granted by RAR, pursuant to which IHI was permitted to design, market, distribute and erect products in Canada based upon the Technology.
[20] According to Mr. Abou-Rached, the “mother company” (which was a reference to IHI) was responsible for payment of all costs to acquire and maintain the patents. The foregoing arrangement was summarized in a letter dated June 17, 1996 from IHI to RAR. The operative provisions of the letter are as follows:
This letter is to confirm that International Hi Tech Industries Inc. (IHI) will continue to be responsible for all legal and filing fees regarding the patents/claims etc., that are related to RAR Consultants Ltd., their agents and associates.
IHI will continue to pay its sole obligation, as per agreement, for costs incurred directly or indirectly on behalf of above patents/claims.
Any GST charged on the above applicable invoices, and paid by IHI, IHI will be the sole party to claim the Input Tax Credits.[8]
During his testimony, Mr. Abou-Rached seemed to indicate that the above arrangement was set out in a licence agreement (presumably between RAR and IHI), but he did not produce a copy of any such agreement at the hearing. In fact, during the examination for discovery of Mr. Abou-Rached, IHI refused to provide to the Crown copies of (as described by the Parties) the Canadian licence agreement and the international licence agreement, on the basis that those agreements were not relevant to IHI’s claim for ITCs.[9]
[21] In 2006 and 2007, the patent agent used by Mr. Abou-Rached and his related corporations was Fetherstonhaugh & Co. (“Fetherstonhaugh”). From December 8, 2005 to January 30, 2007, Fetherstonhaugh issued 84 invoices in respect of the Patents, showing aggregate legal fees and charges in the amount of $290,235.73 and aggregate GST in the amount of $19,144.42.[10] All of the invoices were addressed by Fetherstonhaugh to RAR,[11] but were paid by IHI, rather than by RAR, as RAR did not have a source of revenue and as, according to Mr. Abou-Rached, the fee-payment arrangement summarized above required IHI to make those payments.
[22] Six of the above-mentioned invoices related to Canadian patents, while the balance of the invoices related to foreign patents or to patents in countries that were not specified in the invoices. The invoices relating to Canadian patents are described below:
Date
First Line of Caption
Fees
GST
December 8, 2005
Canadian patent file no.: 2176481
$475.00
$15.75
December 8, 2005
Canadian patent file no.: 2257661
475.00
15.75
December 8, 2005
Canadian patent file no.: 2257660
475.00
15.75
December 8, 2006
Canadian patent file no.: 2176481
485.00
14.10
December 8, 2006
Canadian patent file no.: 2257661
485.00
14.10
December 8, 2006
Canadian patent file no.: 2257660
485.00
14.10
Total
$2,880.00
$89.55
(2) Statutory Provision and Analysis [23] The statutory provision that permits the claiming of an ITC is subsection 169(1) of the ETA, the relevant portion of which states:
169(1) Subject to this Part, where a person acquires … property or a service … and, during a reporting period of the person during which the person is a registrant, tax in respect of the supply … becomes payable by the person or is paid by the person without having become payable, the amount determined by the following formula is an input tax credit of the person in respect of the property or service for the period:
A Ч B
where
A is the tax in respect of the supply, importation or bringing in, as the case may be, that becomes payable by the person during the reporting period or that is paid by the person during the period without having become payable; and
B is
…
(c) … the extent (expressed as a percentage) to which the person acquired … the property or service … for consumption, use or supply in the course of commercial activities of the person. [Emphasis added.]
[24] For the purposes of these Appeals, the above provision of the ETA sets out three conditions that must be satisfied by a person to be eligible to claim an ITC, as follows:
a)the claimant must have acquired property or a service;
b)GST must have been payable or paid by the claimant in respect of the supply; and
c)the claimant must have acquired the property or service for consumption, use or supply in the course of its commercial activities.[12]
[25] In the context of IHI’s claim for ITCs in respect of its payments to Fetherstonhaugh, the above conditions may be worded as follows:
a)IHI must have acquired the patent-agent services of Fetherstonhaugh;
b)GST must have been payable or paid by IHI in respect of the supply of those services; and
c)IHI must have acquired those services for consumption, use or supply in the course of its commercial activities.
It is acknowledged that it was IHI, and not RAR, that paid the GST set out in Fetherstonhaugh’s invoices, and that IHI had commercial activities. However, based on the evidence, it was not clear that IHI acquired the services provided by Fetherstonhaugh or that IHI consumed, used or supplied those services in the course of its commercial activities. Rather, based on the invoices, it appears that it may have been RAR (and not IHI) that acquired the services provided by Fetherstonhaugh.
[26] It is the position of the Crown that RAR, and not IHI, acquired the services provided by Fetherstonhaugh, with the result that IHI was not entitled to claim ITCs in respect of those services. It is the position of IHI that, pursuant to the legal obligation referenced in the above-quoted letter of June 17, 1996, IHI was required to pay for the services provided by Fetherstonhaugh. However, as noted, IHI did not provide a copy of any agreement between IHI and Fetherstonhaugh or between IHI and RAR that required IHI to make those payments. Furthermore, at the examination for discovery of Mr. Abou-Rached, IHI seemed to take the position that the licence agreements between IHI and RAR were not relevant to this issue.[13]
[27] The Crown relies on a statement made by the Federal Court of Appeal in Telus Communications to the effect that only the recipient of a supply may claim an ITC.[14] The Crown submits that, in the context of the services provided by, and the payments made to, Fetherstonhaugh, IHI did not come within the meaning of the term “recipient,” which is defined as follows in subsection 123(1) of the ETA:
“recipient” of a supply of property or a service means
(a) where consideration for the supply is payable under an agreement for the supply, the person who is liable under the agreement to pay that consideration,
(b) where paragraph (a) does not apply and consideration is payable for the supply, the person who is liable to pay that consideration, and
(c) where no consideration is payable for the supply, …
(iii) in the case of a supply of a service, the person to whom the service is rendered,
and any reference to a person to whom a supply is made shall be read as a reference to the recipient of the supply….[15]
[28] To claim an ITC, a claimant must be contractually liable to pay the supplier for the property or service that is the subject of the particular supply.[16] Furthermore, such contractual liability should be based on a contract between the supplier and the recipient, rather than a contract between the recipient and one of its related corporations.[17]
[29] IHI provided the oral evidence of Mr. Abou-Rached to the effect that IHI paid the fees of Fetherstonhaugh. However, IHI did not provide any evidence to establish that IHI (rather than RAR) acquired the services provided by Fetherstonhaugh (so as to come within the wording of subsection 169(1) of the ETA), nor did it provide any evidence of an agreement or other contractual arrangement between IHI and Fetherstonhaugh that required IHI to pay for those services. As noted above, the agreement requiring IHI to pay Fetherstonhaugh’s fees should be between IHI and Fetherstonhaugh, and not between IHI and RAR.[18]
[30] The only evidence provided by IHI to show that IHI was liable to pay for Fetherstonhaugh’s services was Mr. Abou-Rached’s oral testimony and the letter of June 17, 1996 concerning an alleged agreement between IHI and RAR, which agreement IHI failed or refused to produce. That evidence is insufficient to establish that IHI was contractually liable (by reason of a contract between IHI and Fetherstonhaugh) to pay the fees invoiced by Fetherstonhaugh.
[31] Mr. Abou-Rached testified that, in previous reporting periods, the CRA had allowed IHI to claim ITCs in respect of the fees which it had paid to Fetherstonhaugh for services provided in those earlier periods. IHI took the position that, as the CRA had allowed IHI to claim ITCs in those previous reporting periods, the CRA should continue to allow ITCs to be claimed in the current reporting periods. However, if the CRA determines that its previous assessing treatment of a particular registrant was not in accordance with the ETA, the CRA is not precluded from changing its assessing practice on a go-forward basis, so as to assess the registrant in accordance with the CRA’s current understanding of the applicable legislative provisions.
[32] Each of the 84 invoices put into evidence was addressed to RAR and described RAR as the patent owner or as the applicant for a patent. In particular, the invoices rendered by Fetherstonhaugh indicated that a significant portion of the services provided by Fetherstonhaugh related to foreign patent applications in which RAR (and not IHI) was the applicant. Other invoices related to issued foreign patents, in which RAR was shown as the owner of the patent. Each of the six invoices pertaining to Canadian patents described the services as:
Maintaining docket regarding maintenance fee, with notice to you:
Attending to payment of maintenance fee and reporting to you:
It appears that many of the patent-agent services provided by Fetherstonhaugh related to the annual maintenance of various patents owned by RAR and that those services were provided for the benefit of RAR in that capacity. It appears that some of the other patent-agent services related to the application for RAR’s foreign patents. Accordingly, it is my understanding, based on the invoices, that RAR acquired the services provided by Fetherstonhaugh for consumption or use in the course of RAR’s commercial activities. I was not provided with any documentary evidence to indicate that the services of Fetherstonhaugh were acquired by IHI for consumption or use in IHI’s commercial activities. As noted in Garmeco, to qualify for ITCs, a claimant “must demonstrate … that it acquired the goods and services for consumption or use in the course of its own commercial activity [emphasis added].”[19]
[33] For the reasons set out above, IHI was not entitled to claim ITCs in respect of the fees paid by it to Fetherstonhaugh.
C. Payments to Accountants (1) Background [34] In mid-2007, IHI engaged the accounting firm of Dale Matheson Carr-Hilton LaBonte LLP (operating under the trade name “DMCL Chartered Accountants”) (“DMCL”), to prepare and audit the financial statements of IHI for the fiscal year ended December 31, 2006 and the period ended March 31, 2007.[20] On August 29, 2007, DMCL and IHI entered into a letter agreement, in which DMCL indicated that its fees would be determined on the basis of time spent on the engagement at its standard charge-out rates for public company engagements, plus disbursements and applicable GST.[21] In the letter, DMCL requested a retainer of $25,000 to be paid before the commencement of any work, with a further payment of $20,000 on or before September 10, 2007, and the balance to be paid upon release of the financial statements. On August 29, 2007, two members of IHI’s Audit Committee approved and signed the letter agreement on behalf of IHI.
[35] On August 24, 2007, a partner of DMCL had previously sent an email to Mr. Abou-Rached and his brother, René Abi-Rached,[22] setting out an estimate that the audit fee would be approximately $60,000 to $70,000.[23] However, by mid-November 2007, DMCL had done work on the preparation and audit of the financial statements corresponding to an unbilled fee in excess of $129,000.[24] On or about December 7, 2007, DMCL and IHI reached a new agreement, setting the fee for the audited financial statements at $130,000, with the proviso that an additional $35,000 (over and above the $45,000 that had already been paid) was to be paid within a week and that a further $50,000 was to be paid by means of five consecutive payments of $10,000 each, commencing February 29, 2008 (the frequency, e.g., monthly, weekly or something else, was not specified).[25]
[36] As it turned out, IHI made payments to DMCL in the aggregate amount of $80,000, as follows:[26]
Date
Amount
August 31, 2007
$25,000
October 10, 2007
20,000
December 12, 2007
35,000
Total
$80,000
[37] As events unfolded, DMCL did not complete the financial statements and IHI did not make the five periodic payments of $10,000 each. Mr. Abou-Rached testified that IHI never did receive any invoices from DMCL. Accordingly, in preparing its GST returns, IHI treated the $80,000 paid by it to DMCL as being comprised of GST-included payments. Therefore, it treated each payment as consisting of GST and a net fee, as follows:[27]
Date
Amount
GST
Net Fee
August 31, 2007
$25,000
$1,415.09
$23,584.91
October 10, 2007
20,000
1,132.08
18,867.92
December 12, 2007
35,000
1,981.13
33,018.87
Total
$80,000
$4,528.30
$75,471.70
[38] It is the position of the Crown that the three payments made by IHI to DMCL in 2007 were retainers or deposits, and that the right to claim ITCs in respect of those payments arose only when the fees and GST actually became payable to DMCL, which did not occur until DMCL issued an invoice to IHI for the audit fee.
[39] As noted, Mr. Abou-Rached testified that DMCL never did issue an invoice to IHI for the audit fee. However, during the cross-examination of Mr. Abou-Rached, which commenced in the afternoon of the first day of the hearing, he mentioned that, during the lunch break earlier that day, his counsel had received from counsel for the Crown copies of two invoices that counsel for the Crown had obtained that morning from DMCL.
[40] As the cross-examination continued, counsel for the Crown tendered the two DMCL invoices to Mr. Abou-Rached. Counsel for the Crown then explained to the Court that the previous day, after he had received some late-produced documents from counsel for IHI, he (counsel for the Crown) had telephoned one of the partners at DMCL, explained the circumstances of these Appeals, and subsequently, on the morning of the first day of the hearing, received an email, with an attachment containing copies of the two DMCL invoices.[28] No evidence was provided by the Crown as to whether the originals of the two invoices had been sent by DMCL to IHI and, if so, when the invoices were so sent.
[41] The first DMCL invoice, dated February 18, 2008, was in the amount of $2,625, and related to a report that DMCL had issued on January 23, 2008.[29] The second DMCL invoice, which was dated June 19, 2008, was described as an interim invoice for services rendered with respect to the December 31, 2006 year-end audit of IHI,[30] without making any reference to the period ended March 31, 2007. It showed a fee in the amount of $78,452.38, plus GST in the amount of $3,922.62, resulting in a total invoice amount of $82,375.00, which was paid by funds described as having been “Received on Account.” It is my understanding that DMCL insisted on a $5,000 retainer before it would issue the report dated January 23, 2008. As the cost of that report (including GST) was only $2,625, the balance of the $5,000 retainer (i.e, $2,375) was added to the $80,000 received previously, resulting in a total amount, held by DMCL, of $82,375, which was the amount (including GST) of the interim invoice dated June 19, 2008.
[42] To reiterate, Mr. Abou-Rached stated emphatically that he had never seen the invoice dated June 19, 2008, until it was shown to him during the lunch break on the first day of the hearing of these Appeals. Being aware of a breakdown in the relationship between IHI and DMCL, and knowing that DMCL had stopped working on the financial statements, without delivering those statements to IHI, IHI did not think that it would receive an invoice from DMCL, so IHI filed its GST returns for Q3-07 and Q4-07 without having first received an invoice.
[43] To summarize the Crown’s position, it does not dispute that IHI was entitled to ITCs in respect of the payments made by it to DMCL. However, the Crown asserts that the ITCs could be claimed only when the GST became payable, which, according to the Crown, was in 2008. In other words, according to the Crown, IHI claimed the ITCs prematurely.
(2) Statutory Provisions and Analysis [44] Subsection 169(1) of the ETA provides that an ITC is available at the time that GST becomes payable by the recipient of a supply, or is paid by the recipient without having become payable. Thus, in order to determine when the entitlement to an ITC arises, it is necessary to determine (among other things) the time at which the corresponding GST becomes payable. Subsection 168(1) of the ETA provides that GST in respect of a taxable supply is payable on the earlier of the day the consideration for the supply is paid and the day the consideration for the supply becomes due. However, section 168 goes on to set out various exceptions to the general rule in subsection 168(1). In particular, subsections 168(2) and (9) state:
(2) Notwithstanding subsection (1), where consideration for a taxable supply is paid or becomes due on more than one day,
(a) tax under this Division in respect of the supply is payable on each day that is the earlier of the day a part of the consideration is paid and the day that part becomes due; and
(b) the tax that is payable on each such day shall be calculated on the value of the part of the consideration that is paid or becomes due, as the case may be, on that day….
(9) For the purposes of this section, a deposit …, whether refundable or not, given in respect of a supply shall not be considered as consideration paid for the supply unless and until the supplier applies the deposit as consideration for the supply.
[45] One of the issues, in the context of subsection 168(9) of the ETA, is determining whether a particular payment is a deposit or is a partial payment of the consideration for the supply, sometimes referred to in the jurisprudence as a “payment on account.” Concerning this issue, Justice Hogan stated the following in the Tendances et Concepts case:
On reading subsection 152(1) of the Act, it seems clear that the moment at which a deposit becomes a down payment cannot postdate the time of issuing of the invoice, as it is at that moment that the consideration is deemed to become due and, therefore, taxable. Consequently, the tax is generally not payable prior to invoicing in the case of a deposit and, in the case of a down payment, the tax is payable rather as soon as it is received. The two different rules illustrate the importance of properly characterizing and distinguishing the different types of payments made in advance, namely, down payments and deposits. It is important to define the concept of “deposit” (earnest) as opposed to that of “down payment,” where a down payment is simply partial payment to be deducted from an amount due (partial consideration within the meaning of the Act).[31] [Footnote omitted.]
The Tendances et Concepts case involved a consideration of certain aspects of the Civil Code of Lower Canada and the Civil Code of Québec, such that it may not be directly applicable to these Appeals, where the underlying commercial-law principles are derived from common law, rather than from civil law. Furthermore, the Tendances et Concepts case may not carry as much weight now, given that it was based on a previous French version of the ETA, in which arrhes was used as the French equivalent for the English deposit.[32] The 2016 technical amendments to the French text of subsection 168(9) of the ETA replaced les arrhes with un dépôt, without making any amendment to the English text.[33]
[46] To determine when the consideration for a taxable supply becomes due, subsection 152(1) of the ETA states:
152(1) For the purposes of this Part, the consideration, or a part thereof, for a taxable supply shall be deemed to become due on the earliest of
(a) the earlier of the day the supplier first issues an invoice in respect of the supply for that consideration or part and the date of that invoice,
(b) the day the supplier would have, but for undue delay, issued an invoice in respect of the supply for that consideration or part, and
(c) the day the recipient is required to pay that consideration or part to the supplier pursuant to an agreement in writing.
Thus, by reason of paragraph 152(1)(a), in many situations the date of the supplier’s invoice will generally determine when the consideration for the supply becomes due.[34] However, paragraphs 152(1)(b) and (c) of the ETA may, in some situations, provide otherwise.
(a) Agreement in Writing [47] By reason of paragraph 152(1)(c) of the ETA, if, pursuant to an agreement in writing, a recipient is required to pay the consideration, or a part thereof, for a taxable supply before the supplier issues an invoice, for the purposes of Part IX of the ETA, the consideration or part thereof is deemed to become due on the day stipulated in the agreement. Accordingly, it is necessary to consider the agreement that IHI had with DMCL concerning the payment of the fee for the audit of IHI’s financial statements.
(i) Review of Documents [48] It appears that on August 23, 2007 (if not earlier) Mr. Abou-Rached and Mr. Abi-Rached had discussions with Barry Hartley, who was a representative of Barry S. Hartley, Inc., which was a partner of DMCL,[35] about the amount of the fee that DMCL would charge to IHI for auditing the two sets of financial statements. On August 24, 2007, Mr. Hartley sent an email to Mr. Abou-Rached and Mr. Abi-Rached, the body of which was as follows:
As discussed yesterday I estimate the audit fee for IHI to be approximately C$60,000–C$70,000. This amount may vary (lower or higher) depending on the quality of the working paper file provided to us and any other circumstances and issues that we may encounter.
I will communicate with you should it become clear during the audit that this estimate is no longer valid. This would include supportable and valid reason for any over runs.
I trust you find this acceptable. Please let me know should you have any other questions.[36]
Five days later, on August 29, 2007, DMCL and IHI signed the above-mentioned letter agreement,[37] the relevant portion of which is as follows:
Our fees will be determined on the basis of time spent on the engagement at our standard charge out rates for public company engagements plus disbursements and applicable GST. Our terms for payment are net 30 days, interest at 1.0% per month (effective annual interest rate 12.862%) will be charged on overdue accounts. We request that a retainer of $25,000 be paid prior to commencement of our work with a payment of $20,000 by September 10, 2007 and the balance upon release of financial statements.[38]
The above letter agreement describes only the initial payment of $25,000 as a retainer (which was to be paid before work would commence), and seems to imply that the payment of $20,000 and the balance were to be payments on account of the fee.
[49] As mentioned above, by mid-November 2007, the amount of work performed by DMCL, if billed at standard hourly rates, would have corresponded to a fee far in excess of the original estimate given by Mr. Hartley in his email of August 24, 2007. Discussions ensued between DMCL and IHI, which led to a new agreement concerning the amount and payment of the fee, as set out in an email, dated December 7, 2007, from Mr. Hartley to Mr. Abou-Rached and Mr. Abi-Rached. That email read as follows:
As discussed on Monday I would like to confirm our agreement;
* The fee will be fixed at $130,000;
* You have paid us $45,000 to date and the balance of the $130,000 will be paid as follows: $35,000 next week followed by five consecutive paymants [sic] of $10,000 starting the end of February. You will give me the five post dated cheques upon delivery of the signed financial statements for December 2006 and March 2007;
* The June 2007 financial statements will no longer be audited;
* During January 2008 we will provide you with a budget for the March 2008 audit together with a list of all the items that we need your staff to prepare for the March 2008 audit;
* We will commence the audit on Monday December 10, 2007.
I would appreciate it if you can authorize me to take the $35,000 payment, on the credit card previously used for our payment, on Monday December 10, 2007.[39]
The above email simply stated that IHI had paid $45,000 to date, without describing any part of that amount as a retainer, and then went on to set out the schedule for the payment of the balance of the fee, again without making any reference to a retainer. In particular, the above email did not suggest that the $35,000 that was to be paid shortly thereafter was to have the character of a retainer. Thus, it appears that, by reason of the agreement confirmed in the email of December 7, 2007, each payment, already made or yet to be made, by IHI to DMCL was characterized or recharacterized as a payment on account of DMCL’s fee. In particular, it seems that the character of the initial $25,000 payment had changed from a retainer to a payment on account of DMCL’s fee.
[50] As requested in the concluding paragraph of the email of December 7, 2007, Mr. Abou-Rached or Mr. Abi-Rached authorized the requested credit card payment in the amount of $35,000. On December 11, 200