Tax Court of Canada Judgments

Date: 19981110

Docket: 97-2195-GST-I

BETWEEN:

PEMBINA FINANCE (ALTA) LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

_______________________________________________________________

Counsel for the Appellant: Horst G. Wolff

Counsel for the Respondent: Margaret McCabe

_______________________________________________________________

Reasons for Judgment

(Delivered orally from the Bench at Edmonton, Alberta, on October 23, 1998)

Bowie, J.T.C.C.

[1] This appeal is from an assessment made by the Minister of National Revenue under the Goods and Services Tax (GST) provisions found in Part IX of the Excise Tax Act (the Act). The assessment covers the period between July 1, 1991 and December 31, 1995. In summary, the Appellant was found liable to pay $134,473.66 broken down as follows:

Adjustments to GST $ 68,541.48

Adjustments to Input Tax Credits $ 25,496.45

Penalty $ 19,962.23

Interest $ 20,473.50

Total $134,473.66

[2] This assessment was made as the result of an audit performed by Mr. Robert DeGagne of the Edmonton Office of Revenue Canada between June 1995 and June 1996. Mr. DeGagne gave evidence, and my impression was of a careful, conscientious auditor, whose evidence was reliable. I am sure that the audit was a difficult one for him for a number of reasons; not the least of those reasons is the state of the books and records of the Appellant company. Mr. DeGagne was unable to obtain these books and records for several months after his first request, and it is clear, too, from the evidence that when he did obtain them they had not been well maintained.

[3] The Appellant company is in the business of leasing cranes with operators in and around the City of Edmonton, Alberta. The principal or sole shareholder is Mr. James Millar. Also included in the company’s business is purchasing and renovating cranes for resale, making repairs to cranes, and to some extent restoring old motor vehicles for resale. Mr. Millar gave evidence for the Appellant. He did not impress me as being a particularly forthright witness. Apart from his obvious personal interest in the result of this appeal, he was at times evasive under cross-examination, and many of his answers were both self-serving and implausible. I find his evidence as to the company’s transactions to be unreliable, particularly where it is in conflict with documentary evidence in respect of those transactions. It should be borne in mind, too, that many of the transactions took place quite a few years ago, and the written record more likely to be correct than is his memory.

[4] Mr. Millar’s objections to the assessment may be summarized as follows. First, GST assessed on the sale of two cranes, one to Pauline Jacobi and one to John Del Limited. Second, the disallowance of input tax credits claimed in respect of the purchase of two motor vehicles. Third, the disallowance of input tax credits claimed in respect of certain other corporate expenditures, the exact nature of which was not revealed by the evidence. And fourth, the penalties assessed.

[5] I shall deal with these in turn, but before I do, I should mention that there were three other items in the assessment, numbered 065, 068 and 073, to which the Appellant said he took exception, but as to which he offered no cogent evidence to contradict Mr. DeGagne’s conclusions. These items total some $21,000.00 of unpaid tax, or of input tax credit claimed and unsubstantiated. I find that his vague explanations, such as they were, fall far short of convincing me that the audit was in error with respect to any of these items.

[6] I turn now to the four major areas of dispute. In 1991 the Appellant transferred title to a mobile crane to one Pauline Jacobi. Mr. DeGagne assessed GST of $5,724.30 on this transaction. In 1992 the Appellant transferred title to another mobile crane to a company called John Del Limited. Mr. DeGagne assessed GST of $5,200.93 on this transaction.

[7] Mr. Millar testified that Ms. Jacobi is the sister-in-law of his former wife, and that in 1991 he owed her $79,500.00. He and his company were in difficult financial straits at that time, and Ms. Jacobi, he said, was concerned about the security of this loan. According to his evidence, the company therefore conveyed title to the mobile crane to her as security, and following the conveyance the company continued to have possession of the crane and to rent it out as before. He said that no consideration was given by Ms. Jacobi to the company for the crane, and that in March, 1995 he repaid the balance outstanding on the loan in the amount of $53,230.71, following which Ms. Jacobi reconveyed the crane to the Appellant, again without consideration. He also testified that no sale of this crane was recorded in the Appellant’s accounts for the year 1991.

[8] Mr. DeGagne testified that he assessed GST on the conveyance of this crane because he was informed by the Appellant’s bookkeeper that the transaction had been a sale and lease-back arrangement under which Ms. Jacobi purchased the crane for $79,500.00 and then leased it back to the Appellant for an initial payment of $3,000.00 and monthly lease payments of $1,500.00 per month thereafter.

[9] The Appellant’s unaudited financial statements for its fiscal years ending June 30, 1991 to June 30, 1997 inclusive were put into evidence. They show a note payable to Ms. Jacobi, on which a balance of $76,269.00 was owing at June 30, 1990. The loan was retired by the June 30, 1995 year end. It was impossible, however, from these statements alone to say whether or not there was, as Mr. DeGagne believed, a sale and lease-back of the crane or, as Mr. Millar testified, a conveyance and re-conveyance without consideration on either occasion to secure the Jacobi loan.

[10] Exhibit A-4 is a bundle of documents put into evidence by the Appellant’s counsel. It includes a fax message from a collection agent to Mr. Millar dated February 22, 1995. That message confirms that the Appellant

... will be purchasing the crane owned by Jacobi under the option to purchase which was extended to February 10, 1995.

An attachment to that fax shows the computation of the buy-out price as $53,230.71, after the application of lease payments of $3,000.00 on November 20, 1991, and $1,500.00 per month thereafter, with a payment of $25,000.00 in May 1993. Also attached as part of this bundle of documents is a bill of sale between Pauline Jacobi as grantor, and Pembina Finance (Alta.) Ltd., as grantee, in respect of the crane in question. This bill of sale refers to a lease agreement dated November 7, 1991 relating to this crane. Also part of the bundle of documents is a letter from Ms. Jacobi’s lawyer to the Clerk of the Court of Queen’s Bench which suggests that he was acting for her on this occasion. Presumably he would have some knowledge of the nature of the transaction. These documents are more consistent with there having been a sale and lease-back of the crane than they are with the Appellant’s oral testimony. They also are evidence tendered by the Appellant from which he cannot later resile.

[11] Significantly, the lease agreement referred to in the bill of sale was not produced, nor was Ms. Jacobi, or her collection agent, or her lawyer, called to testify. The only explanation that I was given for this was that Ms. Jacobi’s mental health precluded calling her. I do not consider this statement, unsupported as it was by any evidence, to be a satisfactory explanation. I draw the inference that the lease agreement and the evidence of Ms. Jacobi, her lawyer or her collection agent would not have been helpful to the Appellant’s cause. (See Murray v. Saskatoon, [1952] 2 D.L.R. 499.)

[12] I find that the Appellant sold this crane to Ms. Jacobi in 1992 for $79,500.00, of which $5,200.93 was the GST component.

[13] The other conveyance of a crane which is in issue was made by the Appellant to John Del Limited, a company owned 100% by Mr. Millar’s ex-wife. This sale took place in 1992. Mr. Millar’s evidence was that there was no consideration for this transaction either, and that the conveyance was made only to secure an amount owing, or to become owing, by him to his wife in connection with their divorce, which took place at about that time. He said that following the divorce and payment of her settlement he acquired ownership of John Del Limited and that he then had that company convey the crane back to the Appellant, which later sold it to a buyer in the United States. In short, his position is that this, too, was not a sale but merely a conveyance without consideration, to secure an obligation.

[14] This is not consistent with the company’s financial statements. The Statement of Source and Application of Funds of the Appellant for its financial year ended June 30, 1992 shows the sale of an asset for $87,500.00. No other explanation of this item in the books was offered in evidence, and I conclude that Mr. DeGagne correctly took it to be the sale of this crane to John Del Limited for $87,500.00, of which the GST component was $5,724.30.

[15] I turn next to the motor vehicle purchases. The Appellant claimed input tax credits in respect of the purchase of two motor vehicles. One of those is a motor home, which Mr. Millar said he purchased for the company with the intention of reducing the cost of travelling to the United States on buying trips. These trips were made by him to seek out and purchase used cranes for renovation and resale. According to his evidence, rather than pay hotel bills he would be able to sleep in this motor home and thereby save the company money. The Appellant paid $49,500.00 for the vehicle in September 1993, and in the second quarter of 1994 claimed an input tax credit of $3,468.71 in respect of the GST paid on it. Mr. Millar testified that he used it on two business trips, and otherwise it sat in the company’s yard unused for three years. On cross-examination he expanded its use to five trips; two to Bonnyville and three to Calgary, which he said totaled some 1,500 kilometres.

[16] The other vehicle in question was a Chevrolet Corvette, for which the Appellant paid $29,000.00 in August 1994, and in respect of which it claimed an input tax credit of $1,966.58 in the third quarter of 1994. Mr. Millar testified that his personal car was a 1977 Lincoln, which, because of its age, he considered to be unreliable for use on business trips that took him away from the City of Edmonton. He said that the Chevrolet Corvette was available at a favourable price, and so he bought it on the company’s behalf so that it would be available for him to use on business trips. He used it for three or four trips to Calgary; otherwise, it was left in his garage at home.

[17] Mr. DeGagne took the view that these were not in fact vehicles bought by the Appellant for use in its business, but that they were in fact bought for Mr. Millar’s personal use. I agree. Only Mr. Millar’s evidence supports the Appellant’s claim to business use, and that evidence does not convince me. Mr. Millar has been in business for a very long time. His businesses have had their ups and downs, but he is certainly not naïve or inexperienced in financial matters. I do not believe for one moment that he thought that either the motor home or the Chevrolet Corvette was a rational acquisition for business use. It may very well be true that they saw little use, either business or personal, but on the evidence before me I conclude that he bought them not for the advancement of the company’s business, but for his own purposes. To the extent that there was some slight business use made of these assets by the Appellant, the provisions of section 141 of the Act apply to deem its use to be entirely personal. Their acquisition should not be free of the incidence of GST.

[18] Certain other input tax credits were disallowed by Mr. DeGagne, amounting to somewhat more than $32,000.00. The reason for the disallowance was that the Appellant company did not have available for examination, vouchers to authenticate the expenditures recorded in its synoptic ledgers and giving rise to these claims. Mr. Millar testified that after discussing the absence of these receipts with Mr. DeGagne, he spent a great deal of time, over many months, obtaining duplicates from his suppliers, and that he had obtained them for virtually all of the items in question. He then placed them in the company’s files, only to have his landlord, with whom he was engaged in a dispute as to the use of the premises, seize all of these records and truck them away, never to be seen again.

[19] Subsections 169(4) and (5) of the Act require that a registrant have evidence to substantiate a claim for an input tax credit. The reason for this requirement is obvious. The system of providing input tax credits to be set off against tax otherwise payable is inherently subject to potential abuse, unless expenditures can be verified by audit. Mr. Millar’s evidence as a whole did not inspire confidence in me, and without any corroboration I do not accept his bald and very general statement that he had obtained vouchers to verify all of these amounts.

[20] I turn finally to the matter of the penalty assessed. It was submitted to me in argument by counsel for the Appellant, on the strength of the judgment of Bowman J. in Pillar Oilfield Projects Ltd. v. Canada, [1993] G.S.T.C. 49, that the penalty imposed by subsection 280(1) of the Act is subject to the Appellant’s right to make out a defence of due diligence. That decision has been followed by judges of this Court a number of times. On the two occasions that the issue came before the Federal Court of Appeal, that Court found it unnecessary to decide the question. I accept that a defence of due diligence is open to an Appellant who has been assessed a penalty under this subsection.[1]

[21] The Appellant’s counsel went on to urge me to relieve the Appellant of the penalties in this case as, in his submission, the Appellant had relied on a bookkeeper whom Mr. Millar had thought was competent, and because it had lost its records, or some of them, through the actions of its landlord, which were said to be unjustifiable, and the company therefore could not be faulted for the errors resulting in its GST returns. I believe the requirements to make out the due diligence defence were accurately stated by Bowman J. in Pillar Oilfield, where he said at paragraph 27,

... innocent good faith in the making of unintentional errors is not tantamount to due diligence. That defence requires affirmative proof that all reasonable care was exercised to ensure that errors not be made.

[22] In my view, this Appellant could not surmount even the lesser hurdle of innocent good faith. The claims for input tax credits on the motor vehicles necessarily involve some animus on the part of Mr. Millar to thwart the provisions of the Act. The state of the company’s record keeping, as established by Mr. DeGagne’s evidence, is such as to negative the theory that innocent errors were made in good faith. There was no credible evidence given that would tend to establish that any, far less all, reasonable care was exercised by this Appellant, either in its record keeping, or in filing returns under the Act.

[23] The appeal is dismissed.

Signed at Ottawa, Canada, this 10th day of November, 1998.

"E.A. Bowie"

J.T.C.C.

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