McKenzie v. The Queen

McKenzie v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2013-07-26
Neutral citation
2013 TCC 239
File numbers
2009-3334(GST)G
Judges and Taxing Officers
Joe E. Hershfield
Subjects
Part IX of the Excise Tax Act (GST)
Decision Content
Docket: 2009-3334(GST)G
BETWEEN:
LESLIE MCKENZIE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on October 17 and 18, 2011
and March 15, 2012 at London, Ontario.
Before: The Honourable Justice J.E. Hershfield
Appearances:
Counsel for the Appellant:
Scott Smith
Counsel for the Respondent:
André LeBlanc
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under the Excise Tax Act, notice of which is numbered 00000000077 and dated August 20, 1997, for the period March 1, 1995 to July 31, 1996, is allowed, with costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with and for the reasons set out in the attached Reasons for Judgment.
Signed at Ottawa, Canada this 26th day of July 2013.
"J.E. Hershfield"
Hershfield J.
Citation: 2013 TCC 239
Date: 20130726
Docket: 2009-3334(GST)G
BETWEEN:
LESLIE MCKENZIE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hershfield J.
[1] The Appellant was the sole director, officer, employee and shareholder of 731771 Ontario Limited, a company carrying on business as Associated Car Company (“Associated Cars”). She was actively engaged in its business relying to a considerable extent on the employees of a related company: Associated Auctioneers Inc. (“AAI”) to assist in the operation of Associated Cars.
[2] Associated Cars failed to collect and remit GST alleged by the Respondent to have been a failure contrary to the provisions of the Excise Tax Act (the “Act”). An assessment was issued (the “underlying assessment”), an appeal was filed and abandoned and Associated Cars failed to pay the amount assessed. The Appellant was assessed as being liable for the unpaid underlying assessment amount under the director’s liability section of the Act, namely section 323. Her defence, commonly known as the “due diligence defence”, is based on her submission that she acted with the required due diligence in coming to the belief that no GST was collectible in respect of the supplies at issue by virtue of section 87 of the Indian Act.
General Background and the Relevant Provisions of the Act
[3] Associated Cars was a registered motor vehicle dealer engaged in the business of buying and selling vehicles in London, Ontario. It was assessed, pursuant to the provisions of the Act for failing to collect and remit GST on the sale of 572 used cars between March 1, 1995 and July 31, 1996, (the “relevant period”). The assessment also denied input tax credits (ITCs) in respect of the GST paid by it on its purchase of those vehicles. The assessment was in the amount of $1,692,941.10 which included tax, interest and penalties.
[4] A rather unusual assessment process resulted in the Reply to the Notice of Appeal (the “Reply”) stating that the Respondent reserved the right to challenge, in effect, whether the particular underlying assessment that the Appellant was challenging was the correct underlying assessment since there had been two such assessments. The second assessment was in respect of a longer period of time that overlapped the relevant period and was for a larger dollar amount. The Respondent, subsequent to filing the Reply, determined that the first assessment was the correct underlying assessment. Although the Reply was never amended, the Appellant proceeded with the hearing without raising issues over this unusual assessment process.[1]
[5] In any event, Associated Cars withdrew its appeal of the relevant assessment and the resultant liability for tax, penalties and interest was left unpaid.
[6] The Appellant appeals the assessment against her, qua director, on the basis that subsection 323(3) of the Act applies to relieve her of any liability under subsection 323(1). Those provisions read as follows:
Liability of directors
323.(1) If a corporation fails to remit an amount of net tax as required under subsection 228(2) or (2.3) or to pay an amount as required under section 230.1 that was paid to, or was applied to the liability of, the corporation as a net tax refund, the directors of the corporation at the time the corporation was required to remit or pay, as the case may be, the amount are jointly and severally, or solidarily, liable, together with the corporation, to pay the amount and any interest on, or penalties relating to, the amount.
[…]
Diligence
(3) A director of a corporation is not liable for a failure under subsection (1) where the director exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.
The Issues
The Denial of ITCs
[7] The issue of the denial of ITCs was not pursued at the hearing or in the submissions of the Respondent. Accordingly, I will not hold the Appellant liable for that portion of the underlying assessment for which she has been assessed.
GST and Preliminary Comments on “Notional” ITCs
[8] It is not in dispute that Associated Cars did not, in fact, collect and remit GST in respect of the subject sales. Associated Cars took the position, at the time these sales were completed, that the purchasers were exempt purchasers pursuant to section 87 of the Indian Act and as such no GST could be imposed. On the same grounds, the Appellant asserts that she can not be held liable for the collection and remittance failure.
[9] As well, recognizing that a director’s liability is more forgiving, the Appellant in this case relies on the competence of Associated Cars’ agent, AAI, the related company that carried out, as an unpaid contractor, essentially all of Associated Cars’ business that was not directly handled by the Appellant.
[10] While the due diligence issue surrounding the application of section 87 of the Indian Act might seem pointed enough, the heart of the issue, from the Respondent’s perspective, is, in fact, coloured by the role Associated Cars played in a scheme that the Respondent views as misrepresenting the real terms of the vehicle purchase and sale transactions pursuant to which vehicles were only purportedly to be delivered by Associated Cars to a First Nation reserve (“Reserve”). The Respondent, in accordance with published practices, which were set out in Technical Information Bulletin B-039R dated November 25, 1993) focuses on the place of delivery of the subject vehicles in respect of the application of section 87 of the Indian Act without concern over other connecting factors used in income tax cases to determine the application of that section.
[11] The scheme was to take advantage of what might be called an unintended gap in the Act whereby it was possible, using First Nations as intermediaries, for vehicle dealers to receive unintentional multiple “notional” ITCs. Section 176 of the Act, as it read in the relevant period, gave vehicle dealers that acquired used cars ITCs on such vehicles purchased as if GST had been collected by it from the used car vendor. This was a notional ITC if, in fact, no such GST collections were neither made nor required to be made. This would be the case where the vendor of the used cars had acquired them qua consumer and paid GST without receiving an ITC on the sale of that vehicle to the used car dealer.[2]
[12] In brief, notional ITCs were intended by Parliament to ensure that GST paid on supplies along the chain of sales could still be recovered when it came back into the commercial stream by a consumer selling the property to a commercial buyer.
[13] What was not contemplated by Parliament, it seems, was that flipping vehicles through a First Nation would give rise to multiple notional ITCs; i.e. multiple tax benefits. As a result of the proliferation of this abuse, the notional ITC was eliminated in 1996 and replaced with a more limited “trade-in” rule in subsection 153(4).
[14] However, car-flipping schemes completed prior to that amendment, were still attacked by the Canada Revenue Agency (“CRA”) on various grounds.[3] As my analysis will demonstrate, one of the points of attack is to not allow the application of section 87 of the Indian Act unless the used property was delivered to a Reserve. As my analysis will also demonstrate, however, published CRA administrative policies were not always followed.
[15] Before moving on to set out my factual findings in this case, I wish to note a fact that could otherwise get lost in the detail. Associated Cars, as a used car dealer, did not purchase the subject vehicles from consumers and never received the benefit of notional ITCs. Associated Cars was in a chain of other dealers that benefited, but was itself, in effect, only a facilitating intermediary. It paid GST to dealer vendors in all cases and remitted same in respect of each of the 572 used car transactions examined in this appeal. The ITCs it collected were not notional ITCs - they were ITCs claimed for actual GST paid in the normal course of its commercial activities of buying and selling used cars from other dealers.
Background to the Formation of Associated Cars and Associated Cars’ Role in the Scheme
[16] The Appellant testified at the hearing. She has a high school education and six months of nursing studies. After leaving school she worked at various administrative jobs including being an administrative assistant at a bank. She began working for AAI in an administrative capacity in 1985 after her husband, a licensed auctioneer, incorporated AAI. It carried on business as a public auction house in London, Ontario.
[17] At all relevant times, the Appellant’s husband was the sole shareholder of AAI. He also testified at the hearing.
[18] AAI historically would take personal property on consignment from a variety of customers such as financial institutions that may have seized various personal property items or from trustees in bankruptcy who were liquidating the assets of a bankrupt. These consignments included vehicles. Indeed, although AAI was a general auction enterprise, vehicles became its primary source of business even though it was not a licensed motor vehicle dealer and did not employ a registered motor vehicle sales person.
[19] The growth in the vehicle auction business was fuelled by licensed dealers who had vehicles in their inventory to shed and by licensed dealers looking for inventory, so many of AAI’s auction transactions involved vehicle dealer consignment vendors and dealer purchasers. The auction was the means by which these sales were facilitated. AAI would, in the normal course of its business, act as the intermediary in the case of a successful auction sale by acquiring the vehicle from the consignor and transferring it to the successful buyer. In the normal course of its business it took care of all the administrative details of, and paperwork for, these transactions such as transferring ownership from the consignor vendor to itself and then from itself to the auction purchaser.[4] It collected a fee from the purchaser and a commission from the vendor.
[20] However, in its first few years of business, the Ontario government was threatening to shut down AAI’s vehicle consignment business because it was not a licensed motor vehicle dealer. This would cripple a major source of its income. An application by AAI to be licensed as a motor vehicle dealer was denied; hence the formation of Associated Cars by the Appellant. Unlike AAI, it was able to obtain the necessary license. The Appellant also became a registered motor vehicle salesperson in compliance with a requirement imposed on licensed dealers that they have at least one such person engaged in dealer sales. At that point, the Appellant ceased to be an employee of AAI and became the sole employee of Associated Cars.
[21] While the business format and structure changed, practically speaking it seems that not much else changed when Associated Cars first started its business in 1987. The administrative work continued to be done by AAI personnel and the Appellant much as it had always been done. The Respondent did not take issue with this structure between these related, technically unassociated, entities. It was the company’s operating format for years before it started to engage in the subject transactions.
[22] In any event, this business format and structure was in place then when the GST came into force in 1991. Associated Cars was a registrant under the Act and relied on AAI employees to assist in dealing with GST collection and remittance requirements, and making ITC claims in respect of Associated Cars’ transactions, including its large volume of dealer-to-dealer auction sales.
[23] The subject 572 transactions came about as a result of what was described as an expansion of Associated Cars’ business in 1995.
[24] That expansion came about as a result of the Appellant’s husband having been approached by a representative of Canada Auctions with the idea to sell used vehicles directly to First Nations. The sales were to be pre-ordained, at fixed prices between fixed buyers and sellers, with Associated Cars acting solely as an intermediary. Nonetheless, the proposal would enhance sales volume and income and thereby business value, which were important factors to both AAI and Associated Cars in the event of a possible sale of their businesses, a possibility also purportedly raised by this representative of Canada Auctions.
[25] Still, this business proposal must have raised questions in the mind of the Appellant’s husband. He sought advice from AAI’s accountant who then met with the CRA to discuss any issues that would arise with selling used cars to First Nations and not collecting GST.
[26] The accountant met with a CRA officer, Mr. Arner, who testified at the hearing. There is little dispute as to the cautionary comments made by Mr. Arner which were passed on to the Appellant’s husband by the accountant and emphasized again to the Appellant’s husband at another meeting. This second meeting was between the Appellant’s husband and Mr. Arner where the caution was repeated. The caution was that there must be GST charged on sales to First Nations unless the vehicles were delivered to a Reserve and proof of such delivery could be established by appropriate “almost perfect” records.
[27] Mr. Arner testified that he tried to discourage the Appellant’s husband from entering into these transactions. However, his testimony did not suggest that he explained the abuse associated with car-flipping schemes using First Nation buyers, a scheme about which the CRA was then already concerned. Nor did his testimony suggest that he warned of the likelihood of an audit as the reason for suggesting that their records be “almost perfect”. He did testify that he offered to review their documentation to help ensure that there would be no issues in respect to relying on section 87 of the Indian Act.
[28] The Appellant testified that she was not aware of Mr. Arner’s discouraging comments or offer to assist, but she acknowledged meeting with her husband and AAI’s bookkeeper to determine how to proceed. On the other hand, her testimony made it clear that she knew that the subject vehicles were required to be delivered to a Reserve both contractually and for GST purposes. Her testimony did not speak of a discussion at this meeting with her husband and AAI’s bookkeeper, as to how AAI was to proceed and to ensure that this requirement was met. She said that she was knowledgeable about documentation procedures but she did not express any particular knowledge of delivery procedures.
[29] Indeed, the evidence suggests that deliveries were normally the responsibility of the buyer since the inception of the business and before the introduction of the subject transactions. Even after the introduction of such transactions, they only constituted about 20% of Associated Cars’ total vehicle business during the relevant period. That is, during the relevant period, some 80% of Associated Cars’ total vehicle sales were auction sales. Most of the latter business was likely dealer-to-dealer transactions given that this was the primary source of the vehicle business conducted by Associated Cars and AAI. In that context, deliveries were the responsibility of the buyer. If Associated Cars or AAI arranged a delivery to Toronto, an additional fee of $75 was charged.[5] This was not charged in the case of the subject transactions. This led the Respondent to suggest that there were, in fact, no deliveries of the subject vehicles to Reserves.
[30] On the other hand, R.W.A. Inc. (“RWA”), a transport enterprise that delivered 166 of the 572 subject vehicles, charged a delivery fee on a COD basis. RWA delivery documents showed point of origin as Associated Cars (or AAI) and point of delivery at addresses within the Six Nations of the Grand River Reserve (“Six Nations Reserve”).
[31] In any event, the business expansion involving First Nation sales went forward and, as noted, 572 used cars were acquired from dealers and resold by Associated Cars during the relevant period. There were ten used car sellers and five First Nation purchasers.
[32] The vehicle sellers in this case are as follows:
a. Hometown Motors, located in Gananoque, Ontario.
b. Code Ford Mercury Sales Ltd., located in Gananoque, Ontario.
c. Autocrat Motor Cars Inc., located in Oakville, Ontario.
d. Humberview Motors, located in Toronto, Ontario.
e. Gus Zeidler Auto & Boat Sales, located in Orillia, Ontario.
f. Oakville Motors Sales & Leasing, located in Oakville, Ontario.
g. Adnil Holdings, located in Milton, Ontario.
h. Rexe Automotive Wmls, located in Napanee, Ontario.
i. 1159223 Ontario Ltd., located in Ganonoque, Ontario.
j. Bennett Auto Sales, located in London, Ontario.
[33] The purchasers of the vehicles were:
a. CTM Wholesale & Leasing, located in Shannonville, Ontario.
b. Ojibway Car Sales, located in Ohsweken, Ontario.
c. William Wood, located in Ohsweken, Ontario.
d. F. Nettagog Sales, located in Ohsweken, Ontario.
e. Katharine Hopkins, located in Thamesville, Ontario.
[34] While I have noted that Associated Cars acted as purchaser and vendor of all vehicles, and as the registry agent, for both the auction and First Nation sales, there were notable differences.
[35] In respect of auctions, if a bid was successful the vehicle was first transferred and registered as being acquired by Associated Cars and then Associated Cars transferred and registered it to the successful bidder.[6] As I said, delivery was the responsibility of the purchaser. Each vehicle had its own transaction paperwork. Documentation would be routine and complete, although not always accurate. If there was a representation problem as to the vehicle, it could be returned or the price could be adjusted. There would be more reliance on vendor representations on dealer-to-dealer sales.
[36] In the case of the subject vehicles all the sales were dealer-to-dealer sales, so the normal practice of Associated Cars acting as the intermediary registered owner was not always followed. In some cases, Associated Cars would transfer pre-arranged sales directly from the seller to the pre-arranged buyer although delivery remained the responsibility of Associated Cars. Each vehicle still had its own transaction paperwork. Documentation was to be routine and complete although that was not always the case. Inaccuracies were not unexpected or abnormal.
[37] The Appellant testified that some 4,000 automobile auctions were processed during the subject period in addition to the subject transactions. An Agreed Book of Documents consisting of 12 volumes and 572 transactions was submitted at the hearing. Each of those transactions during the relevant period was the subject of the reassessment. That is, they pertained to vehicles that Associated Cars bought for pre-arranged sales and delivery to either the Mississaugas of the New Credit First Nation Reserve (“New Credit Reserve”) or the Six Nations Reserve. Both destinations were in the order of 100 kilometres from London, Ontario.
[38] It is relevant to note the pre-arranged sales of all the subject vehicles included naming the particular buyer, place of delivery and fixing a pre-determined price. Associated Cars essentially only acted as a registry agent and purportedly performed a delivery service.
Further Particulars of the Appellant’s Testimony
[39] The documents included in respect of each of the subject sales were transaction records showing who the vendor and purchaser were. Each record showed the purchase price including GST on the purchase by Associated Cars and the sale price without GST for the sale to the named buyer. Serial numbers of the particular vehicle acquired and received by Associated Cars were noted on each transaction sheet. For every such transaction sheet there was a delivery document which identified, by matching serial numbers, the vehicle acquired by Associated Cars as the vehicle resold by it and purportedly delivered by Associated Cars to the pre-arranged buyer at a particular location.
[40] In the case of deliveries by AAI drivers, delivery locations were not identified by address but rather were identified more generally. For example, some 380 vehicles said to be delivered by AAI drivers to Hagersville were acquired from two dealers in Gananoque and sold to different buyers and had shipping documents that showed the delivery address as “New Credit Reserve”. These shipping documents showed AAI as the point of origin.
[41] Other shipping documents showed a carrier as having delivered the vehicles. That is, there are two distinct types of delivery documents that the Appellant used as evidence: 1) shipping documents when AAI drivers were purportedly used, and 2) shipping documents when a carrier was used. The only carrier identified on the shipping documents was RWA.[7]
[42] The 406 shipping documents that do not have a carrier have, for the most part, a signature by a Walter Sault who appears to have signed as the agent of AAI. Those shipping documents, for the most part, are also stamped by a Randy Walter Sault or a Margaret Sault. The stamps of Randy Walter Sault are initialled whereas the stamps of Margaret Sault bear her signature.
[43] The stamp has the following description if signed by Randy Walter Sault:
Randy Walter Sault, a Commissioner, etc,. County of Brant and the Regional Municipality of Haldimand-Norfolk, while Band Administrator of the Mississaugas of the New Credit First Nation. Expire March 15, 1997.
[44] If the stamp was signed by Margaret Sault it had the following description:
Margaret Sault, a Commissioner, etc,. County of Brant and the Regional Municipality of Haldimand-Norfolk, while Membership/Lands Officer of the Mississaugas of the New Credit First Nation. Expire March 15, 1997.
[45] Also, the shipping documents usually had a second stamp that appeared in one of two forms:
MISSISSAUGAS OF THE NEW CREDIT FIRST NATION R.R. #6 HAGERSVILLE, ONTARIO N0A 1H0
or
AUTOMOBILE RECEIVED AT NEW CREDIT RESERVE CON. 1 LOT 2 & 3 R.R. 1, HAGERSVILLE N0A 1H0 OFFICIAL NEW CREDIT COUNCIL
[Emphasis added.]
[46] No signatures appeared with these latter stamps. The shipping documents without a stamp signed by either Randy Walter Sault or Margaret Sault all had the received at the New Credit Reserve stamp, again without signatures. For the purposes of these Reasons, I will refer to the shipping documents having the received stamp as those having “Receipt Stamps”. The other stamps do not speak expressly to the issue of delivery at a Reserve.
[47] At this point, I should note that Associated Cars was paid at the lowest end $56 and at the highest end $432 as a commission fee from the vendor and the buyer paid a fee of between $100 and $300 in respect of the subject sales. I also note that while no allegation was expressly made that the purchases and sales did not take place in a legal sense, the Respondent, having done a partial search, found a number of instances where no registration transfers were found. The Appellant’s husband testified that not all transfers were registered.[8] Documentary proof of registered transfers was provided for 195 of the subject vehicles. The registrations being referred to are registered transfers from the initial vendors to Associated Cars and then from Associated Cars to the buyer.
[48] It does not seem to be in dispute that the buyer paid by cheque payable to Associated Cars and such amount was deposited in Associated Cars’ account. From that account Associated Cars would pay the initial vendor. Based on such evidence, the Appellant relies on her testimony that all legal formalities were observed.
[49] I note here, as well, that Respondent’s counsel undertook to provide a complete cross-reference of relevant facts pertaining to each of the subject sales. This resulted in a spreadsheet exhibit that Appellant’s counsel viewed and approved. The spreadsheet allowed the Court to more readily see the course that each transaction followed as well as assisting the Respondent in highlighting some of the discrepancies on which reliance was placed.
[50] Indeed there are questionable aspects, if not discrepancies, on the face of many of the shipping documents. For example, in the case of AAI driver deliveries many delivery documents do not have the date of shipping and virtually none have the name of the driver or a specific address for delivery.
[51] As well, in the case of AAI driver deliveries there are many shipping documents that show the purported delivery of vehicles to have occurred days prior to the sale of or payment for the vehicles. There are also shipping documents that showed the purported delivery of the vehicles to have occurred days before Associated Cars was registered as the owner of vehicles. At the hearing, the Appellant testified that the discrepancies in dates were due to the fact that AAI conducts auctions on Tuesdays and Thursdays and auction sales were dated accordingly. Since Associated Cars relied on AAI staff for both its auction sales business and the subject vehicle sales, the documentation for the subject vehicle sales was dated on a Tuesday or Thursday even if that was not the actual sale date.
[52] The shipping documentation also raises odometer reading questions which the Appellant acknowledged in written submissions. On 99 of AAI’s sale forms,[9] the reading of the odometer on the vehicles exceeds the mileage of what was reported by the purported driver on the shipping documents. On 74 of the vehicles, the mileage of what was reported by the purported driver on the shipping documents exceeds the reading of the odometer on AAI’s sale forms. Mr. McKenzie’s testimony provided an explanation for such discrepancies at least in relation to the auction business. AAI’s staff was not required to personally observe the odometer reading upon the receipt of a vehicle from a seller as any discrepancy pertaining to mileage of the vehicle would be raised by the ultimate buyer.
[53] The Respondent submits that the number of mistakes on the odometer readings are highly improbable and that the information may well have been provided by a third party because there was in fact no physical inspection of the vehicle by AAI on behalf of Associated Cars. The Respondent infers that the lack of physical inspection is a result of the vehicles not ever being physically located at AAI’s premises.
[54] To the contrary, Mr. McKenzie testified that Associated Cars would rely on dealer vendors to supply relevant vehicle information such as model and year and odometer readings. If there was a mistake of any significance, the buyer could return the vehicle or negotiate a new price. The inference of the testimony was that Associated Cars was the intermediary in these transactions putting the responsibility on the initial vendor. In effect, it was suggested that it was common in the industry in dealer transactions for the initial vendor to warrant the vehicle specs relieving the intermediary, such as Associated Cars, from having to maintain meticulous and careful inspection records. Discrepancies, he said, were the norm in the industry of auction sales. Indeed, he testified: “I would say that 99 percent of the odometer readings are incorrect at every auction throughout the country.” He also said that things are “far more accurate today than it was back then”.
[55] Other testimony confirmed or asserted the following additional particulars:
· AAI received no compensation for any of the services that it provided to Associated Cars;
· Such services included, for example, an AAI yard employee accepting delivery of a vehicle acquired by Associated Cars. An AAI employee would record vehicle particulars and attend to the delivery of the vehicles, in respect of the pre-arranged sales, to the purchaser once the paperwork was completed. Such paperwork, including the vehicle transfer registrations, was done either by the Appellant personally or by AAI’s employees including its bookkeeper. The only difference in documentation amongst types of transactions was dependent on whether sales were dealer-to-dealer. If they were, one less sales document needed to be completed;
· The Appellant attended at the premises of AAI on a full-time basis as an employee of Associated Cars. When she did not personally attend to the preparation of documents relating to the purchases and sales undertaken by Associated Cars, she said she personally reviewed all of the documentation prepared by AAI staff;
· The Appellant said she frequently observed the vehicles that were involved in the subject sales being delivered to the yard and then being taken away for delivery once the documentation was complete;
· The Appellant said she did not know there was an issue that the subject vehicles had never been delivered to the reserves. Associated Cars ceased doing that business as soon as the Appellant learned that the CRA had a problem with deliveries;
· The Appellant admitted that she had never been to the Reserves and that she relied on AAI’s drivers and RWA to make the deliveries and, as well, that she relied on the Receipt Stamps returned to her by the drivers after deliveries were made;
· The Appellant testified that the bookkeeper for AAI did most of the work relating to GST and that there had never been a GST issue or problem with any of AAI’s compliance with the Act since the introduction of GST until late in 1996 or early 1997 when a CRA auditor indicated that there was a problem;
· The Appellant said that she relied on the fact that her husband had met with the CRA, as had AAI’s accountant, to enquire about the Indian Act exemption and the GST and input tax credit regime that needed to be complied with in the context of that exemption. She said she also relied on her understanding of the way in which Associated Cars conducted its business in respect of the subject sales complied with CRA requirements. Her understanding that the exemption applied to property delivered to the Reserves led her to believe that the shipping documents and Receipt Stamps were sufficient.
Appellant’s Position
[56] The Appellant submits that she exercised the degree of care, diligence and skill necessary to prevent the failure to collect and remit tax and that she had no reason to believe that the subject vehicles were not delivered to a Reserve and thereby exempt from taxation:
a. She was aware that for GST to be exempt for a sale of a vehicle, it would have to be sold to a First Nation and then delivered to a Reserve.
b. She took all the reasonable steps to ensure that the purchaser was a First Nation by requiring the purchaser to produce an Indian status card which was copied and filed with Associated Cars as proof of status.
c. Associated Cars relied upon common practice and forms to evidence delivery to a Reserve.
d. The Appellant had no reason not to rely on the documents relating to proof of delivery presented to her by AAI and the representations of Mr. McKenzie.
e. The sale of vehicles to First Nations was not special except that each transaction required proof of delivery, and in respect of the subject transactions, they were not through a public auction house.
f. The Appellant would match the shipping document to the corresponding sale document to ensure that sales to First Nations had proof of delivery to a Reserve.
g. The Appellant submits that from the particulars of the shipping documents, despite the deficiencies, a reasonable person would conclude that delivery to a Reserve had taken place.
Respondent’s Position
[57] The Respondent submits that the Appellant did not exercise the degree of care, diligence and skill to prevent the failure to remit tax that a reasonably prudent person would have in the circumstances:
a. With respect to the subject sales, the Appellant reduced her handling of the transactions below her normal practice compared to the documentation for Associated Cars’ day-to-day operation.
b. The Appellant provided no evidence of delivery fees charged to the buyer.
c. There were too many problems with the shipping documents to support the required delivery, i.e., in the case of AAI driver deliveries - missing driver or carrier name, shipping address, and so on.
d. The Appellant should not have simply relied on shipping documents from unknown individuals purporting to be First Nations.
e. The Appellant should have taken additional precautions with these “special” transactions.
[58] The Respondent submits that an adverse inference should be drawn from the fact that no key witnesses were called to clarify their role in the transactions.
[59] The Respondent also submits that on a balance of probability the delivery of vehicles did not occur at all.
Analysis
[60] My analysis will proceed under the following headings:
1. The Notional ITC – Legislative Policy and Abuses
2. The Application of Section 87 of the Indian Act to GST
Authorities and Administrative Practices
3. The Due Diligence Defence
(a) Onus of Proof and Underlying Corporate Liability
(b) The Context for Analyzing the Appellant’s Due Diligence Defence: (i) The Appellant’s Reliance
(ii) A Prudent Person’s Reliance
4. Conclusions
1. The Notional ITC – Legislative Policy and Abuses
[61] When the GST came into force in 1991, subsection 176(1) provided as follows:
176. (1) Acquisition of used goods -- Subject to this Division, where
(a) used tangible personal property is supplied in Canada by way of sale after 1993 to a registrant, tax is not payable by the registrant in respect of the supply, and the property is acquired for the purpose of consumption, use or supply in the course of commercial activities of the registrant, or
(b) used tangible personal property is supplied in Canada by way of sale before 1994 to a registrant, tax is not payable by the registrant in respect of the supply, and the property is acquired for the purpose of supply in the course of commercial activities of the registrant,
for the purposes of this Part, the registrant shall be deemed (except where the supply is a zero-rated supply or where section 167 applies to the supply) to have paid, at the time any amount is paid as consideration for the supply, tax in respect of the supply equal to the tax fraction [7/107ths] of that amount.
[62] As noted at the outset of these Reasons, this subsection as it read in the relevant period gave used car dealers ITCs on used cars purchased as if GST had been collected from the dealer by the vendor and remitted out of the total price paid, where, in fact, no collections, payments or remittances were required to be made. Such grant of a notional ITC to a purchaser of used goods, who was in the business of reselling such goods, was conceptually pure. It was intended to ensure that GST originally paid on supplies of new property was recovered from the government when a consumption purchaser resold the property into the commercial stream and the commercial buyer was then required to collect and remit GST again. That resale would not generate the ITC for the consumption purchaser that a normal, uninterrupted, commercial stream of transactions would have allowed. Section 176 gave the lost ITC to the buyer who brings the used property back into the commercial stream. This was an outright tax benefit given to the buyer that Parliament might have believed would be passed onto the purchaser by decreasing the sale price. This is reflected in the July 1997 explanatory notes published by the Minister of Finance. There it is stated that the notional ITC was a mechanism “intended to notionally remove the portion of the current fair market value of the used goods representing tax that was originally paid on the goods and not recovered”.
[63] At the Standing Senate Committee on Banking, Trade and Commerce, to which Bill C-70 (1997) was to amend the Excise Tax Act, Mr. Paré speaking for the Recreational Dealers Association of Canada, addressed his concerns over the elimination of the notional ITC. He noted that the notional ITC was implemented to establish equity in that it seeks to remove an element of double taxation that would otherwise exist. He further stated that it acts as a counterbalance in allowing dealers to better compete with private sellers of vehicles that do not charge GST on the sale. That again reflects the belief that the notional ITCs would be passed onto the purchaser who acquired a vehicle from a dealer.
[64] Still, the notional ITC was repealed due to the abuse. The illustration cited in the course of removing the notional ITC was of the scheme using First Nations as temporary buyers. The illustration was, simply, as follows:
New car dealer à First Nation = NO GST
First Nation à same dealer = NO GST; Dealer gets Notional ITC
[65] In this illustration, the fisc never received any GST but gave the notional ITC to the dealer regardless. This result does not reflect the government’s policy behind the notional ITC. Hence, it was recognized as an abuse that needed to be corrected. The express target was sales to First Nations at a time when the application of the GST to them was uncertain but for CRA administrative practices. Still, illustrating an abuse that needed to be corrected, going forward, should not distract from the analysis in this case.
[66] For example, the CRA traced the vehicles that were involved in the subject transactions and found some at least were flipped more than once ostensibly through a Reserve creating multiple notional ITCs thus each creating a loss to the fisc.
[67] Consider the following somewhat modified illustration of an exhibit tendered at the hearing:
Status Indian A acquires a new vehicle - no GST
A sells to used car dealer X - no GST - Notional ITC
X sells to Associated Cars - GST collected from Associated Cars
- X Gets ITC
Associated Cars sells to Status Indian B - No GST - Associated Cars Gets ITC
B sells to used car dealer Y – no GST - Notional ITC
[68] The result here is that GST is collected once and ITCs are given three times. The process can still be repeated over and over so that the same vehicle will give rise to multiple transactions and multiple ITCs to recover taxes never paid. Using such examples, the Respondent suggested that such car-flipping schemes have led to criminal prosecutions.
[69] However, the car-flipping schemes that led to criminal prosecutions were alleged and found to be fraudulent, leading to convictions for conspiracy to defraud the government through the GST system. See R. v. Prokofiew.[10] No such allegations were made here. Indeed, to say that GST should have been paid and collected in this case requires the R