Les Ventes et Façonnage de Papier Reiss Inc v. The Queen

Les Ventes et Façonnage de Papier Reiss Inc v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2016-12-16
Neutral citation
2016 TCC 289
File numbers
2012-3591(GST)G
Judges and Taxing Officers
Dominique Lafleur
Subjects
Part IX of the Excise Tax Act (GST)
Decision Content
Docket: 2012-3591(GST)G
BETWEEN:
LES VENTES ET FAÇONNAGE DU PAPIER REISS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 17, 2015, November 2 and 3, 2015, and March 14 and 15, 2016, at Montréal, Quebec. Written submissions filed on April 29, 2016, June 10, 2016, and June 29, 2016.
Before: The Honourable Justice Dominique Lafleur
Appearances:
Counsel for the Appellant:
Stéphane Rivard
Counsel for the Respondent:
Maurice Régnier
JUDGMENT
The appeal from the assessment made pursuant to Part IX of the Excise Tax Act, notice of which is dated December 2, 2011, for the following 28 monthly reporting periods, which are not all consecutive: April 2005, July 2005, August 2005, September 2005, October 2005, November 2005, December 2005, January 2006, February 2006, March 2006, June 2006, July 2006, August 2006, September 2006, October 2006, November 2006, January 2007, April 2007, July 2007, January 2008, July 2008, August 2008, September 2008, October 2008, December 2008, January 2009, February 2009 and April 2009, is dismissed, with costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 16th day of December 2016.
“Dominique Lafleur”
Lafleur J.
Citation: 2016 TCC 289
Date: 20161216
Docket: 2012-3591(GST)G
BETWEEN:
LES VENTES ET FAÇONNAGE DU PAPIER REISS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lafleur J.
[1] The Appellant is appealing from an assessment made under the Excise Tax Act, R.S.C. (1985), c. E‑15 (the “ETA”) by the Agence du revenu du Québec (“ARQ”) acting on behalf of the Minister of National Revenue (the “Minister”) (Exhibit I–22), the notice of which is dated December 2, 2011, for the following 28 monthly periods, which are not all consecutive: April 2005, July 2005, August 2005, September 2005, October 2005, November 2005, December 2005, January 2006, February 2006, March 2006, June 2006, July 2006, August 2006, September 2006, October 2006, November 2006, January 2007, April 2007, July 2007, January 2008, July 2008, August 2008, September 2008, October 2008, December 2008, January 2009, February 2009 and April 2009 (the “28 periods in question”). In the Notice of Assessment, adjustments were made to the calculation of the net tax reported ($47,926.78) and a penalty under section 285 of the ETA was added ($13,853.86), as well as interest and penalties for late payment. The adjustments in the net tax calculation take into consideration, among other things, the input tax credits (“ITCs”) claimed by the Appellant and obtained in the amount of $53,203.27 (of which $1,568.58 was allowed by reconciliation). The amounts claimed as ITCs are at issue in the present case.
[2] In particular, six of the Appellant’s suppliers are in question (collectively, the “Suppliers”), all of which had a Goods and Services Tax (“GST”) registration number at the time the invoices were issued. They were:
1. PFG Management (Pierre‑François Gervais) (“PFG”): total ITCs claimed in the amount of $19,389.96;
2. J.S. Récupération 2004 (Jean Sirois) (“J.S. Récupération”): total ITCs claimed in the amount of $1,336.46;
3. Recyclage GHG Inc. (“GHG”): total ITCs claimed in the amount of $1,835.71;
4. 9172‑3726 Québec Inc. or Recyclage Méga Terra (“Méga Terra”): total ITCs claimed in the amount of $17,267.76;
5. Gestion.personel.2008 Inc. (“Gestion”): total ITCs claimed in the amount of $2,961.03;
6. Les transitaires Koudlai Inc. (“Koudlai”): total ITCs claimed in the amount of $10,412.35.
[3] The Minister submits that the Appellant is not entitled to the ITCs claimed because the supporting documents it filed do not meet the documentary requirements set out in the ETA and its regulations. In particular, the Minister submits that the invoices presented are invoices of convenience because the Suppliers are not the true suppliers of the products the Appellant acquired.
[4] As indicated at paragraph 21 of the Reply to the Notice of Appeal, in making the assessment in question, the Minister relied on the following assumptions, among others:
[translation]
. . .
(b) the Appellant operates a business that buys and sells recycled or non-compliant paper;
. . .
(h) the Appellant did not provide Revenu Québec, with sufficient information when required to do so, including information prescribed by regulations, to establish the above-noted CTI amount of $53,203.27 that it claimed and received in its net tax calculation for the 28 periods in question;
(i) more specifically, the Appellant provided supporting documents to establish this ITC amount that do not meet the requirements of the ETA and its regulations;
(j) essentially, the supporting documents (invoices) remitted to Revenu Québec in support of the claimed ITCs regarding supplies of goods or services the Appellant allegedly acquired during the 28 periods in question are false in that the Appellant did not acquire the said goods or services it claims to have acquired or it acquired the said goods or services from a supplier other than those indicated in the supporting documents and the supporting documents in question are invoices “of convenience”;
(k) the purpose of this scheme was for the Appellant, using these invoices “of convenience”, to claim inappropriate ITCs based on the requirements of the ETA when calculating its net tax for the 28 periods in question;
(l) in the present case, the Appellant, the “accommodated” person, used the services of third parties that may or may not have operated real businesses, the “accommodating” persons, namely the six suppliers/sub‑contractors in question, that issued invoices to the Appellant for the supply of goods or services they did not provide to the Appellant and that the Appellant did not acquire from any of them;
(m) moreover, with regard to the purchase invoice provided by the Appellant and issued by PFG Management enr. (Pierre‑François Gervais) [#214211], the supplier’s registration number does not appear;
(n) with regard to the six suppliers/sub‑contractors in question, as a general rule, they succeed one another as supplier/sub‑contractor for the Appellant and the business relationship with each lasts only a few months, rarely more than 12 months;
(o) with regard to any one of these six suppliers/sub‑contractors in question, when it is not all six, they cannot be found;
(p) with regard to any one of these six suppliers/sub‑contractors in question, when it is not all six, the business address on the documentary evidence in question is inaccurate;
(q) with regard to any one of these six suppliers/sub‑contractors in question, when it is not all six, no business was operated by them or they operated a business in a field other than paper recycling;
(r) with regard to any one of these six suppliers/sub‑contractors in question, when it is not all six, they are in default to Revenu Québec with respect to several of Quebec’s tax statutes;
(s) with regard to any one of these six suppliers/sub‑contractors in question, when it is not all six, they do not have the staff or equipment to make the supplies of services (sub‑contracting) or goods that they allegedly undertook to make to the Appellant;
(t) the cheques written by the Appellant to pay for the supplies allegedly acquired from these six suppliers/sub‑contractors were brought to a cheque-cashing business by the said suppliers/sub‑contractors to be cashed;
(u) with regard to any one of these six suppliers/sub‑contractors in question, according to the Société de l’assurance automobile du Québec records, they did not own or lease on a long-term basis from third parties motor vehicles during the relevant reporting periods;
(v) some of the supporting documents provided in support of the ITCs claimed for any one of these six suppliers/sub‑contractors in question have an inconsistent numerical sequence;
(w) the Appellant’s internal control for the six suppliers/sub‑contractors in question is different from that used for the Appellant’s other goods and services suppliers; this control is not as strict (the documentary evidence in question did not include purchase orders issued by the Appellant or the invoice for the associated sale, etc., as opposed to those for the other suppliers);
(x) with regard to any one of the six suppliers/sub‑contractors in question, the payment deadline in the documentary evidence in question (invoices) of the said suppliers/sub‑contractors in question is shorter than for the Appellant’s other suppliers, namely a few days as opposed to deadlines of a few weeks for the other suppliers;
(y) the Appellant made a misrepresentation that is attributable to neglect, carelessness or wilful default by claiming, in the calculation of the net tax it reported in its net tax returns for the first 19 monthly reporting periods (namely April 2005 to July 2007 inclusively), an amount of $39,829.89 as ITCs regarding the invoices of convenience in question;
(z) the Appellant, knowingly or under circumstances amounting to gross negligence when performing an obligation set out in Part IX of the ETA, made a false statement or omission in its net tax returns by claiming, as ITCs in the calculation of its net tax reported during the 28 periods in question, an amount of $53,203.27 with regard to the alleged supplies acquired from the six suppliers/sub-contractors in question;
(aa) the Appellant therefore owes the Minister the amount of the adjustments made to the calculation of its net tax reported for the 28 periods in question in the amount of $47,926.78, for which the amount in question is $53,203.27 ($47,926.78 - ($-3,707.91 + $-1,568.58)), plus net interest and penalties.
A. THE ISSUES. [5] In this case, the issue is whether the Appellant is entitled to the ITCs claimed regarding the invoices issued by the Suppliers. Similarly, it must be determined whether the penalty assessed by the Minister under section 285 of the ETA is justified and whether the Minister could assess the Appellant with regard to certain suppliers under subsection 298(4) of the ETA.
B. THE RELEVANT LEGISLATION. [6] The relevant provisions of the ETA are as follows:
169(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; and
. . .
280.1 Failure to file a return — Every person who fails to file a return for a reporting period as and when required under this Part is liable to pay a penalty equal to the sum of
(a) an amount equal to 1% of the total of all amounts each of which is an amount that is required to be remitted or paid for the reporting period and was not remitted or paid, as the case may be, on or before the day on or before which the return was required to be filed, and
(b) the amount obtained when one quarter of the amount determined under paragraph (a) is multiplied by the number of complete months, not exceeding 12, from the day on or before which the return was required to be filed to the day on which the return is filed.
. . .
285. False statements or omissions — Every person who knowingly, or under circumstances amounting to gross negligence, makes or participates in, assents to or acquiesces in the making of a false statement or omission in a return, application, form, certificate, statement, invoice or answer (each of which is in this section referred to as a “return”) made in respect of a reporting period or transaction is liable to a penalty of the greater of $250 and 25% of the total of
(a) if the false statement or omission is relevant to the determination of the net tax of the person for a reporting period, the amount determined by the formula
A – B
where
A
is the net tax of the person for the period, and
B
is the amount that would be the net tax of the person for the period if the net tax were determined on the basis of the information provided in the return,
(b) if the false statement or omission is relevant to the determination of an amount of tax payable by the person, the amount, if any, by which
(i) that tax payable
exceeds
(ii) the amount that would be the tax payable by the person if the tax were determined on the basis of the information provided in the return, and
(c) if the false statement or omission is relevant to the determination of a rebate under this Part, the amount, if any, by which
(i) the amount that would be the rebate payable to the person if the rebate were determined on the basis of the information provided in the return
exceeds
(ii) the amount of the rebate payable to the person.
. . .
298(4) Idem — An assessment in respect of any matter may be made at any time where the person to be assessed has, in respect of that matter,
(a) made a misrepresentation that is attributable to the person’s neglect, carelessness or wilful default;
(b) committed fraud
(i) in making or filing a return under this Part,
(ii) in making or filing an application for a rebate under Division VI, or
(iii) in supplying, or failing to supply, any information under this Part; or
(c) filed a waiver under subsection (7) that is in effect at that time.
169(4) Documents — L’inscrit peut demander un crédit de taxe sur les intrants pour une période de déclaration si, avant de produire la déclaration à cette fin :
a) il obtient les renseignements suffisants pour établir le montant du crédit, y compris les renseignements visés par règlement;
[…]
280.1 Non-production d’une déclaration — Quiconque omet de produire une déclaration pour une période de déclaration selon les modalités et dans le délai prévus par la présente partie est passible d’une pénalité égale à la somme des montants suivants :
a) le montant correspondant à 1 % du total des montants représentant chacun un montant qui est à verser ou à payer pour la période de déclaration, mais qui ne l’a pas été au plus tard à la date limite où la déclaration devait être produite;
b) le produit du quart du montant déterminé selon l’alinéa a) par le nombre de mois entiers, jusqu’à concurrence de douze, compris dans la période commençant à la date limite où la déclaration devait être produite et se terminant le jour où elle est effectivement produite.
[…]
285. Faux énoncés ou omissions — Toute personne qui, sciemment ou dans des circonstances équivalant à faute lourde, fait un faux énoncé ou une omission dans une déclaration, une demande, un formulaire, un certificat, un état, une facture ou une réponse — appelés « déclaration » au présent article — établi pour une période de déclaration ou une opération, ou y participe, y consent ou y acquiesce, est passible d’une pénalité de 250 $ ou, s’il est plus élevé, d’un montant égal à 25 % de la somme des montants suivants :
a) si le faux énoncé ou l’omission a trait au calcul de la taxe nette de la personne pour une période de déclaration, le montant obtenu par la formule suivante :
A - B
où :
A
représente la taxe nette de la personne pour la période,
B
le montant qui correspondrait à la taxe nette de la personne pour la période si elle était déterminée d’après les renseignements indiqués dans la déclaration;
b) si le faux énoncé ou l’omission a trait au calcul de la taxe payable par la personne, l’excédent éventuel de cette taxe sur le montant qui correspondrait à cette taxe si elle était déterminée d’après les renseignements indiqués dans la déclaration;
c) si le faux énoncé ou l’omission a trait au calcul d’un remboursement prévu par la présente partie, l’excédent éventuel du remboursement qui serait payable à la personne s’il était déterminé d’après les renseignements indiqués dans la déclaration sur le remboursement payable à la personne.
[…]
298(4) Exception en cas de négligence, fraude ou renonciation — Une cotisation peut être établie à tout moment si la personne visée a :
a) fait une présentation erronée des faits, par négligence, inattention ou omission volontaire;
b) commis quelque fraude en faisant ou en produisant une déclaration selon la présente partie ou une demande de remboursement selon la section VI ou en donnant, ou en ne donnant pas, quelque renseignement selon la présente partie;
c) produit une renonciation en application du paragraphe (7) qui est en vigueur au moment de l’établissement de la cotisation.
[7] The relevant provisions of the Input Tax Credit Information (GST/HST) Regulations, SOR/91-45 (the “Regulations”) read as follows:
2. Interpretation — In these Regulations,
“Act” means the Excise Tax Act; (Loi)
“intermediary” of a person, means, in respect of a supply, a registrant who, acting as agent of the person or under an agreement with the person, causes or facilitates the making of the supply by the person; (intermédiaire)
. . .
“supporting documentation” means the form in which information prescribed by section 3 is contained, and includes
(a) an invoice,
(b) a receipt,
(c) a credit-card receipt,
(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; (pièce justificative)
. . .
3. Prescribed Information — 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 section 241 of the Act to the supplier or the intermediary, as the case may be,
(ii) the information set out in subparagraphs (a)(ii) to (iv),
. . .
(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 paragraphs (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.
2. Définitions — Les définitions qui suivent s’appliquent au présent règlement.
[…]
« intermédiaire » Inscrit qui, agissant à titre de mandataire d’une personne ou aux termes d’une convention conclue avec la personne, permet à cette dernière d’effectuer une fourniture ou en facilite la réalisation. (intermediary)
« Loi » La Loi sur la taxe d’accise. (Act)
« pièce justificative » Document qui contient les renseignements exigés à l’article 3, notamment :
a) une facture;
b) un reçu;
c) un bordereau de carte de crédit;
d) une note de débit;
e) un livre ou registre de comptabilité;
f) une convention ou un contrat écrits;
g) tout registre faisant partie d’un système de recherche documentaire informatisé ou électronique ou d’une banque de données;
h) tout autre document signé ou délivré en bonne et due forme par un inscrit pour une fourniture qu’il a effectuée et à l’égard de laquelle il y a une taxe payée ou payable. (supporting documentation)
[…]
3. Renseignements — Les renseignements visés à l’alinéa 169(4)a) de la Loi, sont les suivants :
a) lorsque le montant total payé ou payable, selon la pièce justificative, à l’égard d’une ou de plusieurs fournitures est de moins de 30 $ :
(i) le nom ou le nom commercial du fournisseur ou de l’intermédiaire,
(ii) si une facture a été remise pour la ou les fournitures, la date de cette facture,
(iii) si aucune facture n’a été remise pour la ou les fournitures, la date à laquelle il y a un montant de taxe payée ou payable sur celles-ci,
(iv) le montant total payé ou payable pour la ou les fournitures;
b) lorsque le montant total payé ou payable, selon la pièce justificative, à l’égard d’une ou de plusieurs fournitures est de 30 $ ou plus et de moins de 150 $ :
(i) le nom ou le nom commercial du fournisseur ou de l’intermédiaire et le numéro d’inscription attribué, conformément à l’article 241 de la Loi, au fournisseur ou à l’intermédiaire, selon le cas,
(ii) les renseignements visés aux sous-alinéas a)(ii) à (iv),
[…]
c) lorsque le montant total payé ou payable, selon la pièce justificative, à l’égard d’une ou de plusieurs fournitures est de 150 $ ou plus :
(i) les renseignements visés aux alinéas a) et b),
(ii) soit le nom de l’acquéreur ou son nom commercial, soit le nom de son mandataire ou de son représentant autorisé,
(iii) les modalités de paiement,
(iv) une description suffisante pour identifier chaque fourniture.
[8] Lastly, the relevant provisions of the Civil Code of Québec, RLRQ c. C‑1991 (“CCQ”) read as follows:
2831. An unsigned writing regularly used in the ordinary course of business of an enterprise to evidence a juridical act makes proof of its content.
. . .
2835. A person who invokes an unsigned writing shall prove that it originates from the person whom he claims to be its author.
2836. Writings contemplated by this section may be contradicted by any means.
2831. L’écrit non signé, habituellement utilisé dans le cours des activités d’une entreprise pour constater un acte juridique, fait preuve de son contenu.
[…]
2835. Celui qui invoque un écrit non signé doit prouver que cet écrit émane de celui qu’il prétend en être l’auteur.
2836. Les écrits visés par la présente section peuvent être contredits par tous moyens.
C. The Appellant’s submissionS. [9] According to the Appellant, the invoices issued by the Suppliers meet the requirements under the ETA and its regulations.
[10] Moreover, with regard to certain Suppliers, namely Méga Terra, PFG, J.S. Récupération and GHG (the “4 suppliers”), because the Respondent had already admitted that the supplies noted on the invoices were acquired by the Appellant, the Appellant submits that this admission, in itself, confirms the eligibility to the ITCs claimed, notwithstanding the issue of whether the supplies were acquired from the suppliers that issued the invoices.
[11] The Appellant’s position is that the evidence refutes the Minister’s assumptions at paragraphs 21 (b), (h), (i), (j), (w) and (x) of the Reply to the Notice of Appeal reproduced above.
[12] The Appellant submits that the assumptions at paragraphs 21 (k), (l), (o), (p), (q), (r), (s) and (u) must be established on a balance of probabilities by the Respondent because third parties are involved and, at any rate, these assumptions are not relevant even if they were found to be true. In addition, the Respondent must prove the facts that justify the assessment of a penalty under section 285 of the ETA and making an assessment after the normal assessment period in accordance with subsection 298(4) of the ETA with regard to the 4 suppliers.
[13] The Appellant also cites articles 2831 and 2835 of the CCQ and submits that the Appellant is entitled to the presumption provided for at article 2831.
[14] According to the Appellant, since an internal control mechanism was in force that allowed, in particular, for the Suppliers’ tax numbers to be verified and since the Appellant was not required to conduct any other verifications, the Appellant kept the copies of the relevant invoices and cheques and the Respondent was unable to present evidence that the Appellant was involved in a false invoices or invoices of convenience scheme, the ITCs should be allowed.
[15] Moreover, with regard to the 4 suppliers, the Appellant submits that Jacques Jarry was representing them and therefore, since the Appellant trusted him and had a long business relationship with him (more than 25 years), he did not need to conduct additional verifications.
[16] The Appellant adds that the Suppliers’ being tax offenders has no impact on the admissibility of the ITCs claimed by the Appellant. The fact that the various Suppliers succeeded each other over time is irrelevant according to the Appellant.
[17] Lastly, the Appellant submits that the Respondent did not prove the facts justifying the penalties assessed on a balance of probabilities because the Respondent did not present any evidence that shows the Appellant knew the invoices were false, if such were the case.
D. THE REspondent’s submissionS. [18] The requirements under the ETA and its Regulations are strict and mandatory.
[19] An invoice must contain all the mandatory information, which must be valid, true and accurate, regardless of the degree of good faith of the person claiming the ITCs.
[20] According to the doctrine propounded by the Court of Appeal of Quebec in Agence du Revenu du Québec v. Système intérieur GPBR inc., 2015 QCCA 1402 (CanLII) (application for leave to appeal to the Supreme Court of Canada dismissed on June 9, 2016) (the “GPBR case”), “. . . the invoice must be issued by a registrant that has an interest in issuing the invoice, thereby automatically excluding accommodation invoices. . . These requirements are strict and mandatory. They must be rigorously met by any registrant claiming an ITC, failing which the ITC cannot be granted.” (paras. 38 and 40).
[21] According to the Respondent, the Appellant was unable to rebut the presumption that the assessment is valid because the only evidence it submitted was its statement that it did business with Jacques Jarry, someone named Tony and also someone named Larry. That is not sufficient to discharge the burden of proof.
[22] However, if this Court were to find that the Appellant had adduced such evidence, the Respondent submits that it showed on a balance of probabilities that the Suppliers’ invoices were fake invoices and they were not true suppliers of merchandise.
[23] According to the Respondent, it is not sufficient for the merchandise to be received for a registrant to be eligible for ITCs. The Appellant had to show, on a balance of probabilities, that the Suppliers were true suppliers, which it did not do.
[24] As for the 4 suppliers, the Respondent admitted that the supplies were acquired by the Appellant, but added that the supplies so acquired were not from the suppliers whose names appeared on the invoices; the evidence shows that the true supplier was one Jacques Jarry. The frequent changes of corporations Jacques Jarry used to bill the Appellant should have alerted the Appellant.
[25] As for Gestion and Koudlai, the Respondent submits that no supplies were acquired by the Appellant and that the invoices so issued were false, and, assuming there were supplies in these two cases, the true supplier remains unknown. As for Gestion, since false documents were given to the Respondent in support of the invoices issued by this supplier, it is clear there were no supplies in this case. Moreover, the Respondent is of the opinion that this Court must draw a negative inference from the fact that no witness named Tony or Larry came to testify.
[26] According to the Respondent, the evidence shows that the Appellant did not attempt to contact the directors of the Suppliers and did not verify the identity of the officers and directors with the Registraire des entreprises du Québec (“REQ”). Moreover, I must draw a negative inference from the fact that all the cheques issued to the Suppliers in payment of merchandise were cashed at cheque‑cashing centres. Additionally, there was a real parade of Suppliers.
[27] With regard to the penalty assessed under section 285 of the ETA, the Respondent submits that the Appellant showed wilful blindness in the circumstances because it ignored the many indicia that indicated that the Suppliers on the invoices were not genuine suppliers.
E. The facts. [28] The Appellant was the subject of an ARQ audit because some of its suppliers cashed cheques through cheque‑cashing centres.
[29] Only one person testified for the Appellant, Chaim (Kevin) Faivushevitz; he is the Appellant’s current and only director and has been with the corporation for 16 years. Michel (Moshe) Reiss, who resigned from his position as the Appellant’s president and director in 2011, did not testify at the hearing.
[30] The Appellant did not call its employee responsible for verifying tax numbers (Scott Mitchell) to testify, or Larry, or Tony.
[31] Fourteen persons were called by the Respondent to testify: the various ARQ auditors that audited the Suppliers, Michel Boulet (ARQ auditor for 8 years and responsible for the Appellant’s audit), the directors of certain Suppliers (namely Maxime Grondin from Méga Terra, Pierre‑François Gervais from PFG, Jean Sirois from J.S. Récupération and Kularanjithamalar Markandu from Gestion), Jacques Jarry, Carole Leroux (Jacques Jarry’s accountant), Daniel Héroux (ARQ auditor who conducted the audit of 9072‑6886 Québec Inc. (“Distribution Papier J.M.”) and representatives from the corporation Perkan Inc. (“Perkan”), Pierre Bergeron and Carole Latendresse.
1. The Appellant’s business according to Mr. Faivushevitz’s testimony. [32] According to Mr. Faivushevitz, the Appellant’s business, whose sales figures were in the $2.5M to $4.5M range, carried out the duties of a broker or intermediary between persons selling paper (damaged or non-compliant) and the Appellant’s clients who wanted to acquire this paper. In fact, the Appellant purchased paper from its suppliers and then sold the merchandise to its own clients. The identity of the suppliers was not revealed to the Appellant’s clients, nor was the identity of the clients revealed to the Appellant’s suppliers. Otherwise, the Appellant would no longer have a business. It does not know the source of the paper. A bookkeeper worked for the Appellant and it also used an external accountant.
[33] Mr. Faivushevitz testified that before doing business with a supplier, he verified its credibility and reputation in the field, and examined whether the deal would be beneficial. Moreover, he had regular discussions with his suppliers. Some of them occasionally used the Appellant’s warehouse.
[34] Generally, those who wanted to sell paper would go to the Appellant’s offices with samples of paper or loads of paper, and if there was an agreement, the deal would be concluded right then and there; the invoice would be issued immediately.
[35] Mr. Faivushevitz would not go to the warehouse to inspect the merchandise. After the transaction was entered into and after obtaining the suppliers’ authorization, he would contact the people in charge of the warehouse to give instructions about where to deliver the paper.
[36] Mr. Faivushevitz does not verify the information on the invoices himself; one of his employees, Scott Mitchell, takes care of that. Mr. Mitchell verifies the tax numbers on the government’s website. No verification is conducted regarding the identity of the directors or officers of the corporations that issue invoices. Mr. Faivushevitz admitted before this Court that having information about his suppliers’ corporations is not important to him (namely the identity of the directors and officers), as long as there is paper to sell.
[37] At the hearing, Exhibit A‑1, containing examples of how the Appellant’s business operates, was filed. First, the order is received from the client (purchase order); then, after being authorized to deal with the Appellant, the holder of the paper receives instructions from the Appellant about who will receive the paper delivery (namely, the Appellant’s client); after receiving confirmation of delivery to the client, the Appellant prepares the invoice; then, the Appellant receives the invoice from its supplier and pays it.
[38] Also filed was Exhibit A‑2, which provides examples of the Appellant’s operating method with one of its suppliers, namely Trebano Inc. (“Trebano”). This includes (in chronological order) a copy of the following documents: a purchase order issued by Bengal Converting (one of the Appellant’s clients) to the Appellant; a purchase order issued by the Appellant to Trebano (because Trebano had the paper); an invoice issued by Trebano to the Appellant; an invoice issued by the Appellant to its client, Bengal Converting, and the customs documents. All these documents allow the Appellant to track the merchandise, from the purchase of the paper from a supplier to the sale of this paper to its client.
[39] When a supplier would go directly to the Appellant’s with a load of paper, it was not necessary to have all these documents because the merchandise is already on site. Purchase orders are used by suppliers that do not go directly to the warehouse.
[40] In the case of suppliers that are large corporations, they require many more documents (purchase orders, delivery orders, etc.). However, for small suppliers, fewer documents are needed.
[41] The payment deadline also varies according to the size of the supplier; in principle, the Appellant pays within 30 days. However, the Appellant sometimes pays immediately. Also, the Appellant sometimes pays before delivery of the merchandise. In principle, the Appellant does not pay until it has examined the merchandise. If the Appellant prepays an insurance corporation that had taken possession of the merchandise, there will be no documentation as long as the merchandise is still in the warehouse.
2. The Appellant’s audit. [42] During the audit, the Appellant was very cooperative.
[43] According to Mr. Faivushevitz, he was not made aware of the problems with the Suppliers during the audit. The meeting between Mr. Faivushevitz, Mr. Reiss and Michel Boulet for the purpose of presenting the draft assessment lasted less than an hour. According to Mr. Faivushevitz, the discussions were about general topics. He was very surprised by the assessment.
[44] Michel Boulet reviewed the way the Appellant does business, for example, with so‑called regular suppliers. Copies of documents in the Appellant’s business records regarding transactions conducted with the Appellant’s US suppliers, namely Harmon Associates, SCA Tissue North America LLC and DK Trading Corporation, Inc. and a Canadian supplier, Trebano, were reviewed (Exhibit I‑1, Tabs 6 to 9). These documents include the Appellant’s purchase orders to its supplier, the invoices from the supplier to the Appellant, purchase orders from the Appellant’s clients, invoices from the Appellant to its clients and shipping documents from the Appellant to its clients. In this way, it is possible to track the merchandise throughout the process, from purchase to sale. Moreover, the merchandise is clearly described on the invoices as are the terms and conditions of payment. In principle, payment is made within 30 days; however, with the Suppliers, the payment deadline was always very short, and sometimes the payment is made on the very day the invoice is issued.
[45] Mr. Boulet explained to the Court that in general, the lifespan of issuers of invoices of convenience is relatively short, from 6 months to 1.5 years (Exhibit I‑1, Tab 1, p. 66). In this case, after PFG, J.S. Récupération and Méga Terra were the object of tax audits, the invoices of convenience temporarily stopped, only to reappear a year later with Gestion and Koudlai (Exhibit I‑1, Tab 1, p. 66). This strategy then ended after the first phone call from the ARQ auditor to the Appellant.
[46] In cross‑examination, Michel Boulet admitted that he did not know how many suppliers the Appellant has, or the volume of the Appellant’s sales. He never met Jacques Jarry, except at the hearing before this Court.
[47] The percentage of purchases the Appellant made with the Suppliers compared to all its Canadian suppliers for 2006, 2007 and 2008 is 42.5% (Exhibit I‑1, Tab 1, page 43).
3. The Suppliers. 3.1 Méga Terra (9172‑3726 Québec Inc.).
(a) The invoices. [48] Seven invoices are at issue (Exhibit I‑1, Tab 26), dated from August 22, 2006 to July 18, 2007, for a total of $327,943.55; the disallowed ITCs are for a total of $17,267.76. The cheques issued by the Appellant as payment were all cashed at the same cheque‑cashing centre (Exhibit I‑1, Tab 25).
(b) The information. [49] According to the “État de renseignements d’une personne morale” from the REQ (Exhibit I‑2), Maxime Grondin is the majority shareholder, president and sole director; no change was made since Méga Terra was registered on August 4, 2006. It states that its activity consists of recycling metal for export.
(c) Mr. Faivushevitz. [50] Mr. Faivushevitz assumed that the director and officer of Méga Terra was Jacques Jarry, whom he had known for 15 years; he had been doing business with the Appellant for around 30 years. The only initiative one of his employees took with regard to this supplier was to verify the tax number and he does not recall whether other searches were conducted.
[51] Mr. Faivushevitz added that it is possible that he had met Mr. Grondin before and that he was present during the 2006 meeting during which Jacques Jarry offered paper from the CN train derailment (I will discuss this below) but his memory is not perfect considering the number of years that have passed.
(d) Maxime Grondin. [52] Maxime Grondin explained to the Court that Méga Terra was incorporated upon his return from a 6‑year stay in New Zealand because his father had convinced him to create a corporation to recover metal. The creation of the corporation was entrusted to his father’s accountant, one Robert Enrico. He signed a single cheque on behalf of this corporation and never sold paper. He never opened an account at a cheque‑cashing centre. He does not recognize any invoice issued by Méga Terra to the Appellant in 2006 and 2007; he confirmed that it is not his signature on the back of the copies of the cheques issued by the Appellant to Méga Terra in 2006 and 2007.
[53] Furthermore, Maxime Grondin submits that he does not know either Jacques Jarry or Mr. Faivushevitz.
[54] Maxime Grondin learned that there had been transactions involving Méga Terra when he received a tax bill for $640,000. He tried to resolve things with the tax authorities but he received a call from Mr. Enrico instructing him not to proceed.
(e) Méga Terra’s audit. [55] Luc Jolicœur, ARQ auditor, conducted the audit of Méga Terra for the period of August 1, 2006, to July 31, 2008, because this corporation was cashing cheques in a cheque-cashing centre and had not filed tax returns (audit report under Exhibit I‑11, Tab 47).
[56] Mr. Jolicœur explained that he tried to reach Maxime Grondin, but could not. He did reach someone named Mr. Robidoux at the phone number on the handwritten note on one of the invoices; this phone number is, in fact, the number of the corporation 9073‑3122 Québec Inc. (doing business as Granulation