Date: 19980313
Docket: 96-4661-GST-I
BETWEEN:
OLSON REALTY CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Mogan, J.T.C.C.
[1] At all relevant times, the Appellant operated a real estate brokerage business in Regina, Saskatchewan. The Appellant entered into contracts with a number of individual real estate agents who provided services to the Appellant. Commissions were paid to the agents by the Appellant for the services they provided. The Appellant also paid to each agent with respect to such commissions certain amounts which the Appellant regarded as tax payable under the goods and services tax (“GST”) legislation. The Appellant claimed input tax credits (“ITCs”) with respect to such amounts but those ITCs were disallowed by the Minister of National Revenue in a notice of assessment dated April 2, 1996 for the period May 1, 1991 to October 31, 1994. The Appellant appealed from that assessment and has elected the informal procedure.
[2] In the assessment under appeal, the Minister assessed net tax in the amount of $78,054.95 plus interest of $3,176.62 plus a penalty of $3,006.76. The adjustments arising from the assessment were as follows:
ITCs claimed on amounts $12,767.62
paid to agents
ITCs claimed in error 2,310.00
GST under reported 1,138.48
$16,216.10
The only amounts in dispute in the assessment under appeal are the ITCs of $12,767.62 claimed on amounts paid to agents plus the interest of $3,176.62 plus the penalty of $3,006.76.
[3] There is an additional amount of approximately $31,000 claimed as a rebate by the Appellant. This amount is in dispute and arises out of the same circumstances but will be described later in these reasons.
[4] Exhibit R-1 is a sample contract, typical of the contracts entered into between the Appellant and the individual real estate agents. The following is an important provision contained in paragraph 1 of Exhibit R-1:
... The relationship between the Company and the Salesperson shall not be that of employee and employer, but rather the Salesperson will operate as an independent contractor. In so doing, the Salesperson shall be personally and solely responsible for payment of Income Tax, GST, Canada Pension Plan, Unemployment Insurance, Workers’ Compensation and other related payment obligations required by Federal and Provincial Law. ...
The form of contract in Exhibit R-1 was introduced soon after the GST took effect on January 1, 1991. The Appellant had never collected any form of sales tax before but it took advice and registered for GST purposes. The Appellant knew that it would have to collect and remit GST on the commissions which it charged to its clients. The Appellant advised all of its individual agents to register for GST purposes and to obtain a registration number. The Appellant knew that its agents would be required to pay for certain goods and services in connection with their work; that the agents would be paying GST on such goods and services; and that the agents would be able to claim ITCs if they were registered for GST purposes. Therefore, in the eyes of the Appellant, it made good sense for each agent to register for GST purposes.
[5] Exhibit R-1 contains in paragraph 3 a list of the expenses (3(d) to 3(m)) which the Appellant may incur on behalf of an agent and for which the agent must reimburse the Appellant. There could be GST payable by the agent with respect to some of those expenses. Paragraph 2(g) of Exhibit R-1 describes the commission arrangement between the Appellant and its agents which, within any 12-month period, is a varying split of any commission earned by the agent until the Appellant has received $20,500 along the following lines:
|
Gross Commission |
Agent Portion |
Appellant Portion |
|
first $20,000 |
$10,000 |
$10,000 |
|
next 15,000 |
9,000 |
6,000 |
|
next 15,000 |
10,500 |
4,500 |
|
additional amounts |
100% |
0% |
[6] Paragraph 2(g) of Exhibit R-1 states that the Appellant is to collect all commissions on behalf of its agents and then disburse them in accordance with the above formula. Exhibit A-6 is what the Appellant calls a “Deal Sheet” showing the details of a particular sale transaction, the sharing of the commission, and the GST payable on the commission. Upon paying to each agent his or her portion of any commission, the Appellant also paid an amount which the Appellant regarded as GST because the commission was consideration for a service rendered and was subject to GST. When paying these amounts, the Appellant assumed that each of its agents had registered for GST purposes in accordance with the advice which the Appellant had given to its agents when the GST became law. In fact, unknown to the Appellant, most of its agents had not registered for GST purposes; did not have GST registration numbers; and did not claim ITCs.
[7] In order to understand the Appellant’s position, it is necessary to examine both sides of the commission sharing as between the Appellant and its agents. The Appellant was registered for GST purposes. It collected GST from its client (the vendor) on the full amount of the commission when the sale transaction was completed. At that time, the Appellant could have remitted the GST on the full commission and Revenue Canada would have received what was due with respect to the commission. Instead, the Appellant established the following procedure:
(i) the Appellant remitted to Revenue Canada the GST with respect to the Appellant’s share of the commission;
(ii) the Appellant paid to its agent the agent’s share of the commission plus an amount equal to 7% of the agent’s share which the Appellant regarded as GST; and
(iii) the Appellant claimed an ITC with respect to the 7% amount paid to the agent.
When establishing this procedure, the Appellant assumed that all of its agents had registered for GST purposes and would be remitting the GST less any ITCs they might claim with respect to their own expenses.
[8] I turn now to the agent’s side of commission sharing. Contrary to the Appellant’s assumption, most of the agents did not register for GST purposes. Therefore, they received both their share of the commission plus 7% of their share. Without a GST registration number, an agent could not obtain the credit for remitting GST or claim an ITC. According to the evidence, I conclude that most of the agents simply retained both their share of the commission plus the 7% amount. The net result was that Revenue Canada received GST for only the Appellant’s share of the commission and not the agent’s share.
[9] There is no doubt in my mind that the Appellant acted in good faith throughout this whole process of establishing a procedure to collect and remit the GST. The Appellant honestly believed that it was doing a favour for its agents when it recommended that they register for GST purposes. The Appellant thought that each agent would obtain some financial advantage by being able to claim ITCs. The Appellant erred in assuming that all of its agents had so registered.
[10] In my opinion, the missing link in this procedure was the invoice from the agent to the Appellant stating (a) the amount of the agent’s share of the commission; (b) the 7% GST on such amount; and (c) the agent’s GST registration number. There was no such invoice. The Appellant fell into the trap of overlooking the need for such an invoice because the Appellant determined the agent’s share of the commission and the Appellant could determine the 7% GST on such share. By not requiring an invoice, the Appellant missed the best opportunity to know whether the agent had registered for GST purposes and, if so, the agent’s GST registration number. The Appellant’s procedure was based on a blind assumption that all agents had registered for GST purposes. Events proved that that assumption was ill-founded.
[11] Under section 148 of the GST legislation, a person is a “small supplier” at a particular time if the consideration that became due in a preceding 12-month period for taxable supplies made by the person did not exceed $30,000. Section 166 appears to grant an exemption for a taxable supply made by a small supplier in the following words:
166 Where a person makes a taxable supply ... and the consideration ... for the supply becomes due ... at a time when the person is a small supplier who is not a registrant, that consideration ... shall not be included in calculating the tax payable in respect of the supply.
Apparently, some of the agents who made inquiries about registering for GST purposes were told that they did not have to register because they were small suppliers. That may be true in the sense that a small supplier is not required to register but a small supplier may register if he/she wants to claim ITCs. For whatever reason, most of the agents did not register for GST purposes and that fact was not known to the Appellant until Revenue Canada performed a GST audit in early 1995.
[12] The Appellant claimed ITCs with respect to the 7% amounts paid to its agents because the Appellant regarded those amounts as GST. The Minister of National Revenue did not allow those ITCs because the 7% amounts were not paid to a registrant. Subsection 169(4) sets out certain conditions for the claiming of an input tax credit:
169(4) 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
(b) ...
The Input Tax Credit Information Regulations (P.C. 1990-2755) state that, if the amount paid for a supply is more than $30.00, the registration number assigned to the supplier under section 241 of the Act is prescribed information for the purposes of paragraph 169(4)(a).
[13] Exhibit A-4 is a list of the agents to whom the Appellant paid both the commission plus a 7% amount which the Appellant regarded as GST. Beside the name of each agent in Exhibit A-4 is the 7% amount. The total of those 7% amounts is $12,767.62 which was the original amount in dispute. None of the agents listed in Exhibit A-4 had registered for GST purposes. Therefore, none of those agents could have provided the registration number required under paragraph 169(4)(a) if the Appellant was to make a valid claim for ITCs. All but two of the amounts listed in Exhibit A-4 exceed $30.00. Therefore, the Appellant was required to obtain the registration number from every agent listed in Exhibit A-4 except Tom Wheatley and Irv Brenner. The Appellant’s failure to obtain the registration numbers from the agents listed in Exhibit A-4 (except Wheatley and Brenner) means that the Appellant was not entitled to claim ITCs with respect to the 7% amounts paid to such agents. The Appellant cannot succeed on this primary issue subject to what is stated in the following paragraph.
[14] The Appellant reviewed Exhibit A-4 in oral testimony and identified the following agents from whom part or all of the 7% amounts had been recovered and remitted to Revenue Canada:
|
Agent |
Amount Remitted |
|
Richard Arneson |
$ 34.13 |
|
Pat Berner |
1,675.54 |
|
Thomas Jordens |
46.69 |
|
Joan Demyen |
140.63 |
|
Alma Lessard |
1,406.85 |
|
Lynn Scott |
532.46 |
|
Jim Griffith |
150.00 |
|
Marla Lewis |
332.02 |
|
Deiter Westphal |
577.71 |
The amounts in the above table may not have been verified by Revenue Canada but I understand that Revenue Canada acknowledges that a portion of the $12,767.62 total has been remitted. On the evidence, I must dismiss the appeal with respect to the claimed ITCs of $12,767.62 but, at the same time, I direct the Minister of National Revenue to grant a credit to the Appellant for that portion of the $12,767.62 which has in fact been remitted (either by the Appellant or by the agents) to Revenue Canada.
[15] Section 261 of the GST legislation permits the Minister to pay a rebate of an amount paid as or on account of tax if the amount was paid in error. Relying on that section and having regard to the 7% amounts which the Appellant paid to about 29 of its agents (see Exhibit A-4), the Appellant claimed a rebate in the amount of $31,533.41. By notice of assessment dated November 9, 1995 (Exhibit A-3) the Minister disallowed the rebate. A notice of objection could have been filed with the Minister under subsection 301(1.1) but David Walsh, the Appellant’s accountant acknowledged that the Appellant did not object to the assessment in Exhibit A-3. Accordingly, I hold that the Appellant cannot in this appeal claim a rebate when the question of a rebate was determined by the Minister in the assessment which is Exhibit A-3.
[16] Even if the Appellant were able to pursue its claim for a rebate in this appeal, there are three reasons why I would have to dismiss such a claim. First, the Appellant did not prove any precise amount which could be identified as a rebate. There is no particular amount which I could direct the Minister to repay. Second, “tax” is defined in subsection 123(1) as “tax payable under this Part”. The 7% amounts which the Appellant paid to its agents were not “tax” within the meaning of the legislation. They were simply amounts regarded as tax in the subjective view of the Appellant. Those amounts may have become tax if they had been paid in accordance with an invoice containing the prescribed information in paragraph 169(4)(a). And third, the purported rebate is not connected with any amounts which were paid or remitted to the Minister. The amounts in question were paid to the agents who did not remit them to the Minister. In other words, I think that the Minister cannot be directed to “pay a rebate” (in the words of subsection 261(1)) to any person with respect to certain amounts when the Minister has never received those amounts “by mistake or otherwise”.
[17] Subsection 280(1) requires the payment of penalty and interest if the conditions in that subsection are met. The Appellant has appealed against a penalty of $3,006.76 and interest in the amount of $3,176.82. The penalty and interest are computed with respect to “the amount not remitted or paid”. As I understand the evidence, a portion of the total amount ($12,767.62) which was an adjustment to the ITCs claimed on amounts paid to agents has now been remitted to Revenue Canada either by the Appellant or by the agents. I assume that the remittance of such portion will reduce the penalty and interest which would otherwise be payable. I cannot, however, allow the appeal with respect to penalty and interest when the liability is so clearly spelled out in subsection 280(1) and the Appellant has not succeeded in the primary issue.
[18] The Appellant may have some kind of claim against those agents who received and retained the 7% amounts but any such possible claim is not relevant in the circumstances of this appeal. The appeal is dismissed subject to the credit which I have directed the Minister to grant to the Appellant for that portion of the $12,767.62 which has been remitted to Revenue Canada.
Signed at Ottawa, Canada, this 13th day of March, 1998.
"M.A. Mogan"
J.T.C.C.