Date: 19980527
Docket: 96-2148-GST-I
BETWEEN:
920866 ONTARIO LIMITED, o/a STEVENSON CONSTRUCTION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Mogan, J.T.C.C.
[1] The issue in this appeal is whether the Appellant may be excused from paying a penalty levied under section 280 of the Excise Tax Act which is part of the legislation enacting the goods and services tax (“GST”). The Appellant has elected the informal procedure.
[2] The shares of the Appellant are owned by Delores Stevenson. The shares of Huron Forest Inc. (“Huron Forest”) are owned by Delores’ husband. Huron Forest is engaged in the logging business. The fees or premiums payable under the Ontario Worker’s Compensation Plan are high for a logging operation because of the higher risk of injury to employees engaged in that operation. The Appellant corporation was formed only for the purpose of employing those individuals not directly engaged in the logging operation who might otherwise have been employed by Huron Forest. For example, the Appellant employed the cook, mechanic, bulldozer operator, bookkeeper (Delores) and maintenance person. The services of these persons employed by the Appellant were made available to Huron Forest on the condition that Huron Forest would reimburse the Appellant for its payroll. In the words of Delores, the Appellant “is a payroll company for Huron Forest”.
[3] The primary purpose for incorporating the Appellant was achieved because Huron Forest paid the higher fees or premiums under the Worker’s Compensation Plan for only those employees engaged in logging while the Appellant paid lower fees or premiums for the other non-logging employees.
[4] Each month, Huron Forest paid to the Appellant (in its capacity as a “payroll company”) an amount sufficient to reimburse the Appellant for the cost of its payroll. The Appellant never thought of registering for GST because it had no equipment or other assets, no business operation, and no public customers. If the Appellant had registered for GST and charged GST to Huron Forest for its “payroll” services, any amount of GST paid by Huron Forest to the Appellant would have been recovered by Huron Forest as an input tax credit.
[5] The fact is, however, that the Appellant was obliged to register for GST purposes and should have charged GST to Huron Forest with respect to its payroll services. In the spring of 1995, Revenue Canada performed an audit on the Appellant and assessed GST of $28,062.59 plus interest of $3,085.39 plus penalty of $3,414.98 for the period from April 1, 1992 to December 31, 1994. The Appellant accepted its liability to pay the GST of $28,062.59 because the affiliated company (Huron Forest) would obtain an input tax credit for that amount. In other words, it would be a “wash transaction” for tax purposes. The Appellant objected, however, to the assessment of the interest and penalties.
[6] In response to the Appellant’s objection, the Minister of National Revenue cancelled the interest of $3,085.39 and cancelled the penalty of $3,414.98 but substituted a reduced penalty of 4% of the tax alone. The reduced penalty was $1,122.50 (being precisely 4% of $28,062.59). The only issue in this appeal is the Appellant’s obligation to pay that reduced penalty.
[7] The relevant provisions of the GST legislation are as follows:
280(1) Subject to this section and section 281, where a person fails to remit or pay an amount to the Receiver General when required under this Part, the person shall pay on the amount not remitted or paid
(a) a penalty of 6% per year, and
(b) interest at the prescribed rate,
computed for the period beginning on the first day following the day on or before which the amount was required to be remitted or paid and ending on the day the amount is remitted or paid.
281.1(1) The Minister may waive or cancel interest payable by a person under section 280.
(2) The Minister may waive or cancel penalties payable by a person under section 280.
It can be seen from subsection 280(1) that the penalty of “6% per year” and the interest at a “prescribed rate” is computed for a defined period of time. In other words, the penalty and interest would increase until “the day the amount is remitted or paid”. The Minister has exercised her discretion under section 281.1 to waive all of the interest but only part of the penalty. See Exhibit R-3. The remaining penalty is a flat 4% of the tax and is not computed with respect to a period of time.
[8] Counsel for the Respondent provided to the Court a Bulletin (B-074 - November 28, 1994) published by Revenue Canada entitled Guidelines for the Reduction of Penalty and Interest in “Wash Transactions” Situations. The relevant parts of that Bulletin are as follows:
Where there is a “wash transaction”, the Minister will consider waiving or cancelling the portion of the penalty and interest, payable at the time of assessment, that is in excess of 4% of the tax not properly collected by the supplier.
Where it is determined that the penalty and interest will be reduced to 4% of the tax not collected, the Minister will first waive or cancel all or a portion of the interest. In most cases, the remaining 4% will be penalty which is payable in addition to the amount assessed to account for the GST not properly charged.
...
In all circumstances where the Minister is considering whether to waive or cancel penalty and interest, the Minister retains the right to either waive or cancel only a portion of the penalty and interest, or all or a portion of one or the other.
The waiver of penalty and interest in excess of 4% of the tax not properly charged in a “wash transaction” will normally be considered automatically by the Minister during the audit process. The Minister may also consider requests that are made after a notice of assessment has been issued.
[9] In my opinion, the Minister has a discretion in section 281.1 when considering whether to waive all or part of any interest or penalty that has been assessed. There is no evidence or any other indication which leads me to think that the Minister has not exercised her discretion in an appropriate manner. The Minister’s decision to reduce the penalty to a flat amount computed as 4% of the tax appears to be within the discretion granted in section 281.1. Accordingly, I would uphold the assessment; order the Appellant to pay the penalty of $1,122.50; and dismiss the appeal.
Signed at Ottawa, Canada, this 27th day of May, 1998.
"M.A. Mogan"
J.T.C.C.