Lohas Farm Inc. v. The Queen

Lohas Farm Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2019-12-09
Neutral citation
2019 TCC 197
File numbers
2016-961(GST)G
Judges and Taxing Officers
Johanne D’Auray
Subjects
Part IX of the Excise Tax Act (GST)
Decision Content
Docket: 2016-961(GST)G
BETWEEN:
LOHAS FARM INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on October 4 and 5, 2018, at Toronto, Ontario and on January 22, 2019 by videoconference, at Ottawa, Ontario.
Before: The Honourable Justice Johanne D’Auray
Appearances:
Counsel for the Appellant:
Bobby B. Solhi
Bhuvana Sankaranarayanan
Counsel for the Respondent:
Craig Maw
Tony Cheung
JUDGMENT
(This Amended Judgment is issued in substitution of the Judgment dated September 19, 2019. The modifications deal only with the names of counsel for the appellant and the law firm. There are no changes to the content of the Judgment or the Reasons for Judgment.)
The appeal from the assessments made under Part IX of the Excise Tax Act, notices of which are dated December 10, 2015, May 11, 2015 and May 27, 2015, for the periods of October 1, 2011 to December 31, 2011, January 1, 2012 to January 31, 2012 and March 1, 2012 to March 31, 2012 is allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that:
- There was an agency relationship between Lohas and the buyers.
- Lohas Farm Inc. did not meet the requirements of the ITC Regulations with respect to the name of the recipient or the name of the duly authorized agent of the recipient for the following periods:
- for the period ending 2011, Lohas Farm Inc. is not entitled to claim ITCs of $18,642.
- for the period ending on January 31, 2012, Lohas Farm Inc. is not entitled to claim ITCs of $1,090.32.
- for the period ending on March 31, 2012, Lohas Farm Inc. is not entitled to claim ITCs of $1,623.71.
The appellant is awarded costs in accordance with the Tariff. If the appellant wishes to seek costs in excess of the Tariff, it may file submissions within thirty days from the date of this judgment.
Signed at Montreal, Quebec, this 9th day of December 2019.
“Johanne D’Auray”
D’Auray J.
Citation: 2019 TCC 197
Date: 20191209
Docket: 2016-961(GST)G
BETWEEN:
LOHAS FARM INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
D’Auray J.
I. Overview
[1] During the periods under appeal, iPhones and iPads (“iPhones”) [1] were released in Canada before they were released in Hong Kong and in Taiwan.
[2] The different release dates created a demand in Canada for newly released iPhones for resale in Hong Kong and Taiwan.
[3] Mr. Liu incorporated Lohas Farm Inc. (“Lohas” or the “appellant”) in 2008. Lohas’ main business is blueberry farming and the export of frozen blueberries. Mr. Liu is the sole director and shareholder of Lohas.
[4] Lohas is a registrant for the purposes of the Goods and Services Tax (“GST”) and Harmonized Sales Tax (“HST”).
[5] At the request of a former client in Hong Kong, Lohas purchased iPhones in Canada to export to Hong Kong and Taiwan.
[6] During the periods under appeal, Lohas purchased and exported more than 3500 iPhones to Hong Kong and Taiwan. To do so, Mr. Lui asked friends and acquaintances to purchase the iPhones (“the buyers”).
[7] Lohas did not collect and remit GST/HST on the iPhones as they were exported but did claim input tax credits (“ITCs”).
[8] Lohas’ position is that it was entitled to claim ITCs as an agency relationship existed between it and the buyers.
[9] The respondent’s position is that the buyers were resellers, not agents. As the resellers did not charge GST on the iPhones provided to Lohas, Lohas is not entitled to claim ITCs.
[10] In addition, the respondent’s position is that the information provided by Lohas did not satisfy the requirements of the Input Tax Credit Information (GST/HST) Regulations (“ITC Regulations”).
II. Questions in issue
[11] Is Lohas entitled to claim the amount of $266,233.71 as ITCs for its reporting period ending December 31, 2011, $9,282.43 for its reporting period ending January 31, 2012 and $6,320.35 for its reporting period ending March 31, 2012 pursuant to subsection 169(4) of the Excise Tax Act (“ETA”)?
[12] To determine the answer to this question, two underlying questions must be answered:
(1) Did an agency relationship exist between Lohas and the buyers?
(2) Did Lohas provide the information required under the ITC Regulations, in order for it to claim ITCs?
III. Facts
[13] Lohas was incorporated by Mr. Liu in British Columbia in 2008. During the periods under appeal, its main activity was the operation of an organic blueberry farming business, which included the freezing and exportation of blueberries.
[14] Mr. Liu immigrated to Canada from Taiwan in 2005.
[15] Prior to immigrating to Canada, Mr. Liu had worked in the information technology (“IT”) sector in Taiwan.
[16] One of Mr. Liu’s previous IT clients from Hong Kong asked him if his corporation, Lohas, could buy iPhones in Canada and export them to Hong Kong.
[17] Starting in March 2011, Lohas began purchasing iPhones for export. Initially Mr. Liu, his spouse and his daughter made the purchases for Lohas.
[18] In March 2011, Mr. Liu tried to purchase ten iPhones from an Apple Store. The salesperson told him he could purchase only two iPhones at a time but that he could always come back the next day to purchase more. Mr. Liu did not question the salesperson. He did not try to buy more than two phones at a time after that.
[19] In the fourth quarter of 2011, Apple released a new model of the iPhone – the iPhone 4S. To meet customer demand, Apple placed a limit on purchases of two devices per transaction.
[20] In order to meet the increased demand for the new iPhone from the client in Hong Kong, Mr. Liu decided in October 2011 to ask friends and acquaintances to purchase iPhones. To take advantage of the different release dates, a large quantity of the new iPhones had to be purchased in a short period of time.
[21] With respect to the reporting period from October 1, 2011 to December 31, 2011, Lohas exported 3,597 iPhones to its client in Hong Kong. It reported taxable sales of $0 and claimed ITCs of $281,557.77.
[22] The Minister of National Revenue (the “Minister”) disallowed ITCs of $266,233.71 for the reporting period from October 1, 2011 to December 31, 2011. No adjustment was made to the taxable sales of Lohas by the Minister.
[23] With respect to the reporting period from January 1, 2012 to January 31, 2012, Lohas exported 151 iPhones to its client in Hong Kong and Taiwan. It reported taxable sales of $0 and claimed ITCs of $11,802.43.
[24] The Minister disallowed ITC’s of $10,542.43 for the reporting period from January 1, 2012 to January 31, 2012. No adjustment was made to the taxable sales of Lohas by the Minister.
[25] With respect to the reporting period from March 1, 2012 to March 31, 2012, Lohas exported 96 iPads to its clients in Hong Kong and Taiwan. It reported taxable sales of $0 and claimed ITCs of $7,659.54.
[26] The Minister disallowed ITCs of $6,989.99 for the reporting period from March 1, 2012 to March 31, 2012. No adjustment was made to the taxable sales of Lohas by the Minister.
[27] The Minister allowed ITCs for the periods in question on purchases made from retail resellers such as Best Buy and Future Shop. Some purchases made by buyers, who were registrants under the ETA and had valid GST numbers, were also accepted. As they are not in issue, I will not comment any further on these purchases.
IV. Analysis
[28] Before examining whether an agency relationship existed between Lohas and the buyers, I first have to consider the following preliminary issues:
(1) Who bears the burden of proof?
(2) Are the assumptions in the Reply to Notice of Appeal properly pled?
(1) Who bears the burden of proof?
[29] Lohas argues that the burden of proof lies on the respondent for failing to properly plead the assumptions of fact made by the Minister in her Reply to Notice of Appeal. To place this issue in context, I will examine first the general principles regarding the burden of proof.
[30] In tax appeals, as a general rule, the burden of proof rests on the taxpayer. The basic principles regarding the burden of proof are summarized by the Federal Court of Appeal in House: [2]
[30] In determining the issue before us, it is important to keep in mind the Supreme Court of Canada’s decision in Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336 (Hickman), where Madam Justice L’Heureux-Dubé enunciated, at paragraphs 92 to 95 of her Reasons, the principles which govern the burden of proof in taxation cases:
1. The burden of proof in taxation cases is that of the balance of probabilities.
2. With regard to the assumptions on which the Minister relies for his assessment, the taxpayer has the initial onus to “demolish” the assumptions.
3. The taxpayer will have met his initial onus when he or she makes a prima facie case.
4. Once the taxpayer has established a prima facie case, the burden then shifts to the Minister, who must rebut the taxpayer’s prima facie case by proving, on a balance of probabilities, his assumptions (…).
5. If the Minister fails to adduce satisfactory evidence, the taxpayer will succeed.
[31] The “assumptions” mentioned by the Federal Court of Appeal in House are assumptions of fact only: assumptions of law or assumptions of mixed fact and law should not be included in the recitation of the Minister’s factual assumptions. As was stated by the Federal Court of Appeal in Anchor Pointe Energy Ltd.: [3]
[24] Paragraph 10(z) was struck by Rip J. for an additional reason. He considered it to be a conclusion of law “that has no place among the Minister's assumed facts”.
[25] I agree that legal statements or conclusions have no place in the recitation of the Minister's factual assumptions. The implication is that the taxpayer has the onus of demolishing the legal statement or conclusion and, of course, that is not correct. The legal test to be applied is not subject to proof by the parties as if it was a fact. The parties are to make their arguments as to the legal test, but it is the Court that has the ultimate obligation of ruling on questions of law.
[26] However, the assumption in paragraph 10(z) can be more correctly described as a conclusion of mixed fact and law. A conclusion that seismic data purchased does not qualify as CEE within the meaning of paragraph 66.1(6)(a) involves the application of the law to the facts. Paragraph 66.1(6)(a) sets out the test to be met for a CEE deduction. Whether the purchase of the seismic data in this case meets that test involves determining whether or not the facts meet the test. The Minister may assume the factual components of a conclusion of mixed fact and law. However, if he wishes to do so, he should extricate the factual components that are being assumed so that the taxpayer is told exactly what factual assumptions it must demolish in order to succeed. It is unsatisfactory that the assumed facts be buried in the conclusion of mixed fact and law.
[32] In Shaughnessy, [4] former Chief Justice Bowman made the following comments regarding the extent of the respondent’s duty to plead assumptions:
[13] […] The pleading of assumptions involves a serious obligation on the part of the Crown to set out honestly and fully the actual assumptions upon which the Minister acted in making the assessment, whether they support the assessment or not. Pleading that the Minister assumed facts that he could not have assumed is not a fulfilment of that obligation. The court and the appellant should be entitled to rely upon the accuracy and completeness of the assumptions pleaded. Sadly, this is becoming increasingly difficult. The entire system developed in our courts relating to assumptions and onus of proof is in jeopardy if the respondent does not set out the actual assumptions on which the assessment is based with complete candour, fairness and honesty.
[33] Recently in Sarmadi, [5] Justice Webb of the Federal Court of Appeal questioned the principles set out by Justice L’Heureux-Dubé in Hickman Motors Ltd. (cited in House above). Justice Webb stated that in tax cases, the Court, after hearing all of the evidence, has to determine whether the taxpayer has proven on a balance of probabilities that the facts assumed by the Minister are incorrect. [6] Justice Webb held that the burden does not shift to the Minister − either the taxpayer proves that the assumptions of fact made by the Minister in assessing the taxpayer are incorrect or not. Justice Webb stated as follows at paragraphs 31 and 63 of his reasons:
[31] In my view, the taxpayer has the onus of proving, on a balance of probabilities, for any facts that are in dispute:
(a) such facts as are alleged by the taxpayer in their notice of appeal; and
(b) subject to certain exceptions, that such facts as assumed by the Minister in reassessing the taxpayer are not true…
[…]
[63] Once all of the evidence is presented, the Tax Court judge should then (and only then) determine whether the taxpayer has satisfied this burden. If the taxpayer has, on the balance of probabilities, disproven the particular facts assumed by the Minister, based on all of the evidence, there is no burden to shift to the Minister to disprove what the Tax Court judge has determined that the taxpayer has proven. Either the taxpayer has disproven the assumed facts or he, she or it has not.
[34] While agreeing in the result, the other members of the Federal Court of Appeal in Sarmadi took no position on the principles governing burden of proof. Justice Stratas expressly declined to express a definitive opinion on the issue stating that, before reaching a conclusion on such a fundamental issue, he preferred having the insights of commentators, the judges of the Tax Court and the assistance of counsel in a future appeal where the issue would be raised.
[35] In Morrison, [7] Justice Owen of this Court undertook a thorough analysis of the Supreme Court of Canada’s decisions dealing with burden of proof. He held that the persuasion burden cannot shift from the taxpayer to the Minister. Justice Owen stated the following at paragraphs 94 to 97 of his reasons:
[94] L’Heureux Dubé J. [in Hickman Motors Ltd v the Queen, [1997] 2 SCR 336] states at paragraphs 92, 93 and 94:
It is trite law that in taxation the standard of proof is the civil balance of probabilities . . . and that within balance of probabilities, there can be varying degrees of proof required in order to discharge the onus, depending on the subject matter. . . . The Minister, in making assessments, proceeds on assumptions. . . . and the initial onus is on the taxpayer to “demolish” the Minister’s assumptions in the assessment . . . . The initial burden is only to “demolish” the exact assumptions made by the Minister but no more . . .
This initial onus of “demolishing” the Minister’s exact assumptions is met where the appellant makes out at least a prima facie case . . . .
Where the Minister’s assumptions have been “demolished” by the appellant, “the onus . . . shifts to the Minister to rebut the prima facie case” made out by the appellant and to prove the assumptions: . . . . Hence, in the case at bar, the onus has shifted to the Minister to prove its assumptions that there are “two businesses” and “no income”. [Emphasis already added]
[95] L’Heureux-Dubé J. restates the principle from Johnston that the taxpayer is only required to demolish the precise assumptions of fact made by the Minister. L’Heureux-Dubé J. also acknowledges that the persuasive burden on the taxpayer must be met on a balance of probabilities. L’Heureux-Dubé J. goes on to state that this burden may be discharged by presenting a prima facie case and that the discharge of taxpayer’s burden results in a persuasive burden on the Minister. L’Heureux-Dubé J.’s remarks regarding a prima facie case being sufficient to demolish the assumptions of fact appear to be predicated on her view that “within balance of probabilities, there can be varying degrees of proof required in order to discharge the onus”.
[96] With respect, the subsequent decisions of the Supreme Court of Canada in McDougall and Merck Frost have made clear that there is only one civil standard of proof—on the balance of probabilities—and that while the evidence required to meet this standard is dependent on all the circumstances, the standard itself does not vary. Moreover, the term “prima facie case” is typically used to describe an evidential burden and not a persuasive burden. Paciocco and Stuesser, the authors of The Law of Evidence (7th ed., 2015) describe the prima facie case standard as follows:
The prima facie case standard is an important example of an “evidential burden.” It is used as a screening process to see whether it is justifiable and sensible to have a case go to the trier of fact who is designated by law to give an ultimate factual decision on the matter. . . .
[97] Anderson Logging and Johnston assign the persuasive burden relating to the correctness of the assessment to the taxpayer. With respect, this persuasive burden cannot be “shifted” to the Minister and there is no presumption or statutory rule that upon the taxpayer’s satisfaction of the persuasive burden places a separate evidential burden or persuasive burden on the Minister.
[36] I agree with Justice Webb’s comments in Sarmadi and Justice Owen’s in Morrison. The persuasive burden relating to the correctness of an assessment should not shift between the taxpayer and the Minister with respect to facts that are within the knowledge of the taxpayer. As in any civil case, once the evidence is heard, the judge must make a determination as to whether, on a balance of probabilities, the taxpayer has met the burden of proof.
[37] However, given that the test set out by Justice L’Heureux-Dubé in Hickman Motors Ltd. is still applied by the Courts. I will apply it in this appeal. I should note that my decision would be no different had I applied the approach set out by Justice Webb in Sarmadi and Justice Owen in Morrison.
(2) Are the assumptions of fact in the Reply to Notice of Appeal properly pled?
[38] Lohas takes issue with some of the assumptions relied upon by the Minister in the Reply to the Notice of Appeal (the “Reply”). It argues that assumptions that are of mixed fact and law refer to facts outside its knowledge, or that were not set out in the Reply are improper. As a result, Lohas argues that the burden of proof should shift to the Minister.
[39] The respondent argues that even if some assumptions are improper and must be disregarded, the Minister’s remaining assumptions of fact are sufficient to uphold the assessment. Therefore, the burden of proof is on Lohas to establish that there was an agency relationship between it and the buyers.
(i) Assumption at subparagraph 26(g) of the Reply states: The [buyers] were not employees or agents of the appellant.
[40] The respondent’s counsel admitted at trial that the assumption at subparagraph 26(g) is an assumption of mixed fact and law, and therefore improper.
[41] I agree with the respondent’s concession. However, I do not agree with Lohas that this results in the burden of proof shifting.
[42] As the respondent points out, even without the assumption at subparagraph 26(g), other assumptions made by the Minister are sufficient to uphold the assessments. More particularly, the assumptions of fact at paragraphs 26(e), 26(f), 26(h) and 26(i) of the Reply are capable of sustaining them:
26e) the iPhones and iPads that the Appellant exported were primarily purchased from individuals [the “Buyers”] who had purchased them from Apple;
26f) the purchase and sale contracts for the iPhones were between Apple Inc. and the [Buyers];
26h) the [Buyers] who purchased the iPhones and iPads were not registered for GST purposes;
26i) the [Buyers] did not charge the Appellant GST/HST on the sale of the iPhones and iPads.
[43] Therefore, I am of the view that Lohas retains the burden of establishing that the above assumptions of fact are incorrect. Lohas must establish that the buyers were not resellers of iPhones but acted as agents of Lohas in purchasing the iPhones.
(ii) Assumption at paragraph 26(j) of the Reply states that: Apple Inc. was not aware that the [buyers] were purchasing the iPhones and iPads to resell them to the appellant.
[44] Lohas argues that this assumption of fact does not benefit from a presumption of correctness since it refers to an unrelated third party, namely Apple Inc.
[45] The presumption of correctness of the Minister’s factual assumptions and the resulting burden cast on the taxpayer is based on the premise that the facts are normally within the taxpayer’s knowledge, since the taxpayers affairs or business are under scrutiny. [8] Assumptions of fact that are not exclusively or peculiarly within the taxpayer’s knowledge may not benefit from the presumption of correctness.
[46] The assumption at paragraph 26(j), deals with the mindset of Apple’s salespeople, namely whether Apple “was aware or not aware” that the buyers were purchasing iPhones to resell them to Lohas. As was pointed out in Leung, [9] the Minister cannot plead as an assumption a fact that the taxpayer could not reasonably be expected to either prove or disprove. Therefore, this assumption does not benefit from the presumption of correctness.
(iii) Assumptions made by the Minister, but not included in the Reply
[47] There are three components for an agency relationship to exist, namely: both the principal and the agents must consent to the relationship; the agents must have the power to bind and affect the principal’s legal position and the principal must have the ability to exercise control over the agents.
[48] Based on the testimony of, Ms. MacNaughton, auditor at CRA, Lohas argues that the Minister relied on assumptions of fact in assessing Lohas that were not included in the Reply to Notice of Appeal. Lohas submits that the assumptions of fact should have included that the Minister, in assessing Lohas, took into account:
- that both Lohas and the buyers agreed to form an agency relationship, namely, the buyers agreed to buy iPhones on behalf of Lohas (“consent”);
- Lohas instructed and gave directions to the buyers (“control”).
[49] Ms. MacNaughton is an auditor with the Canada Revenue Agency. She was responsible for auditing Lohas for the periods ending in 2012 but not for those ending in 2011. She was the respondent’s nominee at the examination for discovery and therefore had to familiarize herself with, and answer questions relating to, not only the 2012 periods, but also the 2011 ones. In her testimony, she indicated that in her view the consent and control elements were established. However, Ms. MacNaughton was of the view that an agency relationship did not exist between Lohas and the buyers because the agents were not able to affect the principal’s legal position.
[50] That said, contrary to Lohas’ position, I am of the view that her testimony is not determinative of the issue since the existence of the agency elements is one of law for the Court to determine.
[51] As I have already stated in these reasons, the respondent improperly pleaded in her Reply, as an assumption of fact, the conclusion that “the Buyers were not the Appellant’s employees or agents”. I also explained that while I will not consider this particular assumption as an assumption of fact that benefits from the presumption of correctness, I found that the other assumptions of fact assumed by the Minister in her Reply, were sufficient to support the validity of the assessment. Accordingly, Lohas has the burden of establishing that there was an agency relationship between it and the buyers.
[52] Lohas also argues that it was improper for the respondent not to plead, in her Reply, assumptions of fact that favour its position that an agency relationship existed, namely that the consent and the control elements were satisfied.
[53] In tax appeals, there is no doubt that a thorough disclosure of all assumptions is to be made by the respondent. For example, in Mungovan, [10] former Chief Justice Bowman stated:
[15] The respondent has an obligation to disclose all of the facts upon which the assessment was based. Conceivably some of the facts assumed are wrong or irrelevant. They should still be disclosed. I would not wish to discourage the full disclosure of facts. The mere fact that the lawyer drafting the reply may have thought an assumption was wrong, irrelevant or embarrassing to the Crown's case is no reason for failing to disclose it. Indeed, in Bowens v. The Queen, 94 D.T.C. 1853, aff'd 96 D.T.C. 6128, the effect of failing to plead assumptions that were central to an assessment was discussed. The Federal Court of Appeal at p. 6129 suggested that the Crown's Reply might have been struck out for failing to plead a fact that was at the basis of the assessment.
[54] Lohas argues that if the respondent had pleaded that the consent and control elements for forming an agency relationship had been met, Lohas would have benefitted from the presumption of correctness attributed to the assumptions of fact for those two elements. Lohas further argues that even though these assumptions were not pleaded in the Reply, it should benefit from the presumption of correctness on them, as they should have been pleaded. Accordingly, Lohas submits that there is a reversal of the burden of proof on consent and control and that the respondent must establish that they did not exist.
[55] A similar argument on unpleaded assumptions was made before the Federal Court of Appeal in Bowens [11] , where the Court stated:
The judge also took the view that the Crown had the burden of showing that the taxpayer and Trilogy were at arm's length. If we understand him correctly, this was because of the mutually contradictory but unpleaded assumptions which had been made in the reassessment process and in particular the initial assumption that the relationship was non-arm's length. While we agree with the result, the reasoning is, with respect, wrong: as we made clear in Pollock vs. The Queen, 94 DTC 6050, unpleaded assumptions can have no effect on the burden of proof one way or the other. The reason the Crown bore the burden in this case of proving that Trilogy and the taxpayer were at arm's length is that was a fact on which the validity of the reassessment depended, and since no assumption to that effect had been pleaded the Crown did not have the benefit of any reversal of onus. [12]
[Emphasis Added.]
[56] Unlike Bowens, the validity of the assessment in this appeal depends not only on whether the consent and control elements of an agency relationship existed, but also on whether the buyers had the ability to affect Lohas’ legal position. In addition, as I have stated previously in my reasons, the assumptions of fact in paragraphs 26(e), 26(f), 26(h) and 26(i) of the Reply are sufficient to uphold the assessment. Therefore, I do not agree with Lohas that there is a shifting of the burden.
[57] Moreover, as stated by the Federal Court of Appeal in Pollock, [13] unpleaded assumptions can have no effect on the burden of proof one way or the other.
[58] However, to paraphrase former Chief Justice Bowman in Shaughnessy, [14] I do not wish to encourage incomplete, reserved or “dishonest” disclosures of the Crown’s factual assumptions. Therefore, while the unpleaded assumptions do not affect the burden of proof, I need to keep in mind their effect on Lohas in marshalling its evidence with respect to the appeal.
[59] The respondent asked me to draw a negative inference against Lohas on the existence of the consent and control elements as it failed to call any of the buyers as witnesses. I will not do so as it would be unfair to Lohas.
[60] The respondent’s witness, Ms. MacNaughton, who was the respondent’s nominee at the examination for discovery, stated during discovery that, in assessing Lohas, the Minister had assumed that the consent and control elements existed. Although I have found that her view of the existence of these elements is not determinative, Lohas relied upon Ms. MacNaughton’s answers in preparing its case and it would be unfair to draw an inference against it for failing to call evidence on the issues.
(3) Did an agency relationship exist?
[61] There is no dispute, for the purposes of the ETA that a principal is entitled to claim ITCs in respect of supplies purchased by its agents on its behalf. Therefore, if I find that there was an agency relationship between Lohas and the buyers, Lohas would be able to claim its ITCs, provided it satisfied the ITC Regulations regarding information.
[62] Here, there is no written agreement between Lohas and the buyers. As a result, the conduct of Lohas and the buyers must be scrutinized to determine if an agency relationship existed by implied contract.
[63] The only witness who testified as to the conduct of the parties was Mr. Liu. I found him to be a credible witness.
[64] In the leading textbook on agency, Canadian Agency Law, G.H.L. Fridman [15] discusses the creation of an agency relationship by implied contract in these terms:
As with other contracts, the agency relationship may be impliedly created by the conduct of the parties, without anything having been expressly agreed as to terms of employment, remuneration, etc…. The assent of the agent may be implied from the fact that he has acted intentionally on another’s behalf. In general, however, it will be the assent of the principal which is more likely to be implied…. Such assent may be implied where the circumstances clearly indicate that the principal has given authority to another to act on his behalf. This may be so even if the principal did not know the true state of affairs. Mere silence will be insufficient. There must be some course of conduct to indicate the acceptance of the agency relationship. The effect of such an implication is to put the parties in the same position as if the agency had been expressly created.
[65] In GEM Health Care Group Ltd. [16] Justice Sommerfeldt referred to the decision of Justice Hogan in Fourney, [17] where the concept of an implied agency relationship was also discussed:
[29] In Fourney v The Queen, Hogan J stated that “the test for finding an agency relationship in the absence of a written agreement is restrictive; it requires evidence of the necessary conduct.” He quoted portions of Professor Fridman’s comments in respect of implied agency, as set out in an earlier edition of the above-mentioned textbook on agency law, and stated a few principles pertaining to implied agency. Several of those principles are paraphrased as follows:
a) In the absence of a written agency agreement, a court must closely examine the conduct of the parties to determine whether there was an implied intention to create an agency relationship.
b) In reviewing the conduct of the alleged principal and the alleged agent, a key consideration is to determine the level of control which the former exerted over the latter.
c) The alleged principal’s control over the actions of the alleged agent may be manifested in the authority given by the former to the latter. In other words, the concepts of authority and control sometimes overlap.
d) Where it is alleged that a corporation is acting as the agent of its shareholders, a high threshold of evidence is needed.
[66] The views of the Canada Revenue Agency in respect of implied agency relationships are similar and are set out set out in Policy Statement P-182R: [18]
Agency exists where one person (the principal) authorizes another person (the agent) to represent it and take certain actions on its behalf. The authority granted by the principal may be express or implied. In other words, an agency relationship may be created where one person explicitly consents to having another act on its behalf or behaves in such a way that consent is implied....
While two parties may agree that one party is to act as agent with respect to transactions undertaken on behalf of the other party, the absence of such an agreement is not sufficient to conclude that an agency relationship does not exist.
Although the intention of the parties is an important determinant of the nature of the relationship between the parties, case law supports the possibility that two parties may be engaged in an agency relationship without even being aware of it, provided their actions indicate that one party is acting as agent on behalf of another. In other words, agency is generally evident from the conduct of the parties.
[67] Justice Dawson of the Federal Court of Appeal in the decision of Club Intrawest, lists the components of an agency relationship:
With respect to agency relationships generally, citing Royal Securities Corporation Ltd. v. Montréal Trust Co. et al., [1967] 1 O.R. 137 at page 155, [1996] O.J. No. 1078 at paragraph 55; aff’d [1967] 2 O.R. 200, [1967] O.J. No. 997 (Ont. C.A.), the Tax Court correctly noted that the three generally accepted components of an agency relationship are:
i. Both the principal and the agent consent to the agency relationship.
ii. The principal grants authority to the agent allowing the agent to affect the principal’s legal position.
iii. The principal controls the agent’s actions.
[68] I will examine each component of an agency relationship taking in account the abovementioned law on agency and the facts in this appeal.
(iv) Both the principal and the agent consent to the agency relationship.
[69] Mr. Liu personally knew the buyers he asked to purchase iPhones on behalf of Lohas. He stated that he trusted these people since they were friends or acquaintances who were part of his Buddhist Community. Many of them were students. He stated that they had visited his farm and had helped him there.
[70] When Lohas required iPhones, Mr. Liu called the buyers and asked them to purchase as many iPhones as they could. Mr. Liu stated that he could have bought the iPhones himself. However, due to Apple limiting purchases to two iPhones per transaction and the short time limit within which the iPhones had to be bought, Mr. Liu decided to ask the buyers to purchase iPhones on behalf of Lohas.
[71] The buyers trusted Mr. Liu, in the sense that they were buying expensive devices using their own credit cards or cash. Mr. Liu stated that he guaranteed the buyers that they would be reimbursed for every iPhone they purchased even if there was a decrease in the demand for iPhones from the client in Hong Kong.
[72] Mr. Liu stated that if an accident occurred which damaged the iPhones while in the possession of the buyers, he would have felt obligated to pay the buyers for the iPhones. This never occurred. Mr. Liu further stated that Lohas did not have any insurance to cover damages on the iPhones while in possession of the buyers.
[73] Mr. Liu explained that once a buyer purchased the iPhones, and he or she had a fair number of iPhones, the buyer would call Mr. Liu to let him know. Mr. Liu would schedule a meeting with the buyer. Mr. Liu chose to meet the buyer either close to an Apple store, or at the parking lot of a financial institution, either HSBC or TD Canada Trust (“TD”). Mr. Liu had asked the buyers to open an account at HSBC or at TD to facilitate the transaction, namely the transfer of money. Mr. Liu stated that Lohas started to use bank drafts in October 2011. At times, Lohas paid some buyers in cash. However, the general practice was to use bank drafts to pay for the iPhones and the commissions.
[74] Before paying a buyer, Mr. Liu would inspect each iPhone box, noting the serial number of the iPhone (“IMEI”) and ensuring that the IMEI on the iPhone box matched the IMEI on the receipt. The buyers would give him the Apple store receipts as they were needed for export purposes. Mr. Liu always asked for the buyer’s ID to ensure that the bank draft was issued using the buyer’s legal name. Mr. Liu explained that in his community, people tend to use chosen names as opposed to their given legal names. He stated that he knew the names the buyers were commonly using were not necessarily their legal names.
[75] According to Lohas, the consent element with the buyers was crystallized when the buyers brought Mr. Liu the iPhones. Between October 2011 and the end of December 2011, 3,597 iPhones were purchased by the buyers and Mr. Liu. They were then exported by Lohas to Hong Kong and Taiwan. Lohas submitted that the testimony of Mr. Liu and the documentary evidence filed at trial were sufficient to establish that the consent element for an agency relationship was satisfied.
[76] The respondent argued that Mr. Liu’s testimony was not sufficient to establish that the buyers agreed to act as agents of Lohas. The respondent submitted that it is impossible to establish the consent of both parties to an oral contract, when one party, here the buyers, has not been called as a witness. The respondent did not submit any jurisprudence on this point.
[77] The respondent noted that Mr. Liu asked the buyers to buy as many iPhones as they could. According to the respondent, while this establishes that Mr. Liu wanted to buy a large number of iPhones in a short period of time, it does not establish that the buyers consented to an agency relationship.
[78] The respondent further argued that Mr. Liu’s answers on cross‑examination established that the buyers were resellers and not agents of Lohas. On cross-examination, Mr. Liu admitted that he did not tell the buyers that they would be acting as agents of Lohas. Also, he was not able to say how many buyers were acting as Lohas’ agents. Although, he stated that he could calculate how many agents Lohas had by reviewing its journal.
[79] In addition, the respondent noted that the commissions the buyers would receive from Lohas for purchasing iPhones were not set in advance between the parties.
[80] The respondent also pointed out that Mr. Liu testified that he did not care who bought the iPhones on behalf of Lohas. He was aware that the buyers were using their friends to buy iPhones but that did not matter to him.
[81] Finally, the respondent noted that it also did not matter to Mr. Liu if the names on the Apple store receipts were missing, fictitious or unreliable. While aware of this, Mr. Liu did not mind as long as he was provided with iPhones to export.
[82] On the basis of the above, the respondent argues, that that the buyers were buying the iPhones and reselling them to Mr. Liu and the relationship was not one of agency.
[83] Despite the respondent’s argument, in my view, Lohas has established that the buyers consented to buy iPhones on its behalf. The following satisfies me on this point.
[84] Mr. Liu advised the buyers when to purchase iPhones and when to stop buying them. Mr. Liu stated when the demand was decreasing, he told the buyers to stop buying.
[85] Mr. Liu testified that Lohas had an obligation towards the buyers to pay for the iPhones that they purchased. There was a mutual understanding that Lohas would reimburse and pay a commission with respect to every iPhone purchased, even if the buyers bought more phones than the Hong Kong client required.
[86] Mr. Liu stated that if the phones had been damaged while in the possession of the buyers, Lohas would have reimbursed the buyers as he had guaranteed the buyers that they would be reimbursed for the iPhones. Counsel for Lohas argued that the buyers could have easily sued Lohas if it had refused to reimburse the buyers.
[87] It is very unlikely that the buyers would have purchased such expensive phones without an agreement that they would be reimbursed and paid a commission.
[88] While Mr. Liu stated that he did not use the word “agent” with the buyers, he also stated that the buyers k