Date: 20010727
Docket: 2000-3620-GST-I
BETWEEN:
ANDREW BLANCHARD O/A FOUR PILLAR FINANCIAL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
For the Appellant: The Appellant himself
Counsel for the Respondent: Arnold H. Bornstein
___________________________________________________________________
Reasons for Judgment
(Delivered orally from the Bench on June 7, 2001, at Toronto, Ontario)
Bowie J.
[1] This appeal concerns the Appellant's claim to be entitled to input tax credits (ITCs) under the provisions of Part IX of the Excise Tax Act (the Act). In returns filed for the periods February 15, 1996 to January 31, 1997 (the first period), and February 1, 1997 to January 31, 1998 (the second period), the Appellant claimed ITCs of $21,012.99 and $6,147, respectively. By an assessment made on June 17, 1999, the Minister of National Revenue (the Minister) allowed ITCs of 2.7% of the amount claimed for the first period, and allowed no ITCs for the second period.
[2] Mr. Blanchard is licensed to sell securities in Ontario. On September 1, 1993 he entered into an agreement with Financial Concept Group (FCG) whereby he became the owner, operator and manager of the Oakville branch of FCG. In that capacity he was expected to recruit a sales staff, which he did. He and his sales staff were expected to, and did, sell securities, GICs, insurance and other such financial products for which they were paid commission by FCG. Mr. Blanchard was paid commissions on his own sales, and an override commission on the sales made by his staff. These staff members, who were called advisors in the evidence, were not employees of Mr. Blanchard or FCG; they worked in his branch office, but as independent contractors, according to his evidence.
[3] In order to maximize his own income through override commissions, it was important to Mr. Blanchard to retain his complement of salespersons, or advisors, in his office. To do this he had to provide them with office space and an environment that was conducive to attracting new business. To this end, he rented office space in Oakville, furnished it, installed telephones, and provided a receptionist and other administrative staff to operate the office.
[4] Another means of attracting potential new business for the advisors was through an income tax preparation service which the Appellant established. By advertising in the local newspapers, he attracted clients to have their income tax returns prepared for $25. The Appellant, some of his administrative staff, and most of the advisors provided this service. The advisors were not paid for giving this service, but their reward lay in the opportunities to sell the various financial products to the people whose returns they prepared.
[5] Another facet of the Appellant's business is the collection of fees payable annually to the trustees of self-directed Registered Retirement Savings Plans (RRSPs). These fees have to be collected each year from the owner of the RRSP. This is a task which the sales staff do not relish, and they are glad to have the services of the office administrative staff to assist in it. Cheques payable to FCG are collected from the clients and delivered to FCG to be transmitted to the trustees of the self-directed RRSPs. The funds do not go through the accounts of Four Pillar Financial.
[6] Mr. Blanchard's evidence was that if he ceased to provide these various services and facilities to the sales staff they would simply go and work elsewhere. Indeed, he said that during an income tax audit of himself which took place over several months, many of his salespeople left and went to the Burlington office of FCG.
[7] Ms. Pimm was, at the relevant time, the office manager of the Four Pillar operation, for which she was paid a salary. She was also a branch manager for mutual funds under a contract with FCG. She was paid commissions directly by FCG for her work as its branch manager of mutual funds.
[8] The essence of Mr. Blanchard's case is that he personally is the recipient of his commission income from FCG, and that Four Pillar Financial is a partnership made up of himself, his wife, and, during 1996, Ms. Pimm. The business of Four Pillar consists of the tax preparation operation, the collection of RRSP fees, and providing office facilities, without remuneration, to the sales staff. The Appellant, his wife and Ms. Pimm have apparently filed income tax returns on a partnership basis, and there is evidence before me that the Minister has assessed them on that basis. However, it is trite that the Minister is not bound to perpetuate error, and he is not precluded from asserting in this litigation that the Four Pillar business is not a partnership.
[9] The issue before me, then, is whether Four Pillar Financial was, at the relevant time, a business separate from the business of Andrew Blanchard personally as the manager of the Oakville Branch of FCG. If it was, then it was not a financial institution and it did not provide financial services, with the result that it is entitled to recover input tax credits under Part IX of the Act. If, as the Minister contends, there is only one business, then the nature of that business must be determined under section 149 of the Act, and the extent of its entitlement to ITCs, if any, falls to be determined under sections 169, 141 and 141.01.
[10] Mr. Blanchard was very definite in his evidence that he could only receive commissions in his personal capacity, and not as a partner with unlicensed partners. That made it important, in his view, to establish that Four Pillar was a partnership, and he gave evidence accordingly. He also called Ms. Pimm, whose evidence was that she was a partner during 1996 with a 5% interest in Four Pillar. She said that she had put $11,000 into the company at that time, and that she had claimed a loss on her income tax return in 1996. Mr. Blanchard said in his evidence that he introduced Ms. Pimm to people as his partner. Mr. Blanchard's wife did not testify.
[11] Mr. Blanchard could not produce any written partnership agreement amongst himself, Ms. Pimm and his wife, or any of them. He did produce a copy of a business name registration which showed himself and John B. MacDonald, an accountant, as the partners carrying on business under the name Four Pillar Financial. The period covered by the registration is August 25, 1993 to August 24, 1998. On September 22, 1994, Mr. Blanchard and Mr. MacDonald signed a Partnership Termination Agreement. No other document evidencing the existence of a partnership and its terms was produced.
[12] In the Notice of Objection dated June 24, 1999, Mr. Blanchard described himself as "owner" and said this:
I personally operate as a self employed independent contractor. This is a relationship which many of my fellow advisors have challenged and is now clearly an accepted relationship by Revenue Canada.
Four Pillar Financial is a proprietorship that I established in 1993 to recoup cost via a share in other independent contractors revenues. The relationship between myself and the independent contractors is through an understanding between Four Pillar Financial and Financial Concept Group. In effect I get a percentage of sales based on a complicated schedule set by Financial Concept Group.
There is no suggestion anywhere in that document that Four Pillar Financial was at any time a partnership.
[13] The Notice of Appeal, which also was prepared by Mr. Blanchard personally (again describing himself as "owner") says in part:
4. In addition to the selling of mutual funds and other securities, Four Pillar Financial, as noted in Paragraph 1 above, prepares income tax returns for which it received a fee. As well and of more importance, Four Pillar Financial, as part of its agency responsibilities must provide RRSP administrative information to the clients. In particular, its responsibility is to collect these fees on an annual basis and turn them over to IPC Securities Corporation.
5. Both the preparation of the income tax returns and the RRSP administration fees are subject to GST, which as [sic] been collected by Four Pillar Financial. As agent for IPC Securities Corporation, the entire amount of the fees and GST are turned over to that company for remittance to the Government. On the other hand Four Pillar Financial remits any GST applicable to the income tax preparation, as principal, directly to the Government.
[14] Aside from the filing of income tax returns, to which I have referred already, there is no suggestion by Mr. Blanchard prior to giving evidence in this appeal that Four Pillar Financial, after September 22, 1994, was anything other than a proprietorship owned by him. More important for purposes of this appeal is that prior to the hearing of the appeal there was no suggestion that there were two separate businesses being conducted - one earning commission income on the sale of securities, and one earning fees for the preparation of income tax returns. In giving his evidence Mr. Blanchard tried to characterize his commission income paid to him by FCG, for which he received T-4 slips, as having been received by him as income personally and then paid into the partnership, Four Pillar Financial, as a capital contribution. I do not accept this as an accurate description of what happened. It is inconsistent with the financial statements prepared for Four Pillar.
[15] Mr. Blanchard led evidence from Mr. Simpson, a chartered accountant who prepared Four Pillar Financial's financial statements for the years ending December 31, 1996 and 1997. He prepared the statements as part of a review engagement, from trial balances printed from the computer records of Four Pillar and given to him by Mr. Blanchard, and on the basis of information furnished to him by Mr. Blanchard. He testified that Four Pillar was a partnership of Andrew Blanchard, Andrea Blanchard and Monika Pimm. It became clear on cross-examination, however, that in giving this evidence he was simply repeating what he had been told by Mr. Blanchard. He also testified on cross-examination that the financial statements which he had prepared were not consolidations, although they include both the income from commissions (direct and override) paid to Mr. Blanchard by FCG, and the income derived from the preparation of income tax returns. An examination of the statements themselves is consistent with that. There is no mention of consolidation; there is no attribution of expenses between two sources of income; generally, references to the owner or proprietor are in the singular (although in at least one place the word "proprietors" appears with the apostrophe following the "s"). Although the balance sheets show the proprietor's equity, as one would expect, they do not show the capital of the various partners, as one would expect if the business were really a partnership. Mr. Simpson's evidence as to the existence of a partnership is simply not consistent with the statements that he himself prepared.
[16] I do not accept Mr. Blanchard's evidence that the business was a partnership, nor that of Ms. Pimm to the same effect. Ms. Pimm did not appear to me to be dishonest or devious; however, I believe that she did not properly understand the legal nature and requirements of a partnership. She likely thought of herself as a partner in the colloquial sense of the word, as Mr. Blanchard testified that he introduced her to people as his partner. Mr. Blanchard, in my view, was less scrupulous about the accuracy of his testimony. He has given inconsistent versions of the facts in his Notice of Objection and his Notice of Appeal, on the one hand, and in his evidence on the other. I believe that his testimony was shaped by his desire to present the version of the facts that would best suit his purposes at the moment.
[17] Given the total absence of documentary evidence of a partnership agreement, the fact that Mr. Blanchard did not call his wife to give evidence is significant. According to his version of the facts, she was his only partner in 1997. If, as he testified, there was a partnership with no written agreement, then it would be in the Appellant's interest to lead evidence of the existence of an oral agreement and the terms of it from the other partner. The inference that I draw is that his wife's evidence would not have been helpful to his case.
[18] I conclude that in 1996 and 1997 Four Pillar Financial was a sole proprietorship owned by Andrew Blanchard. From the evidence of Mr. Blanchard and Ms. Pimm as to the operations, I find that the earning of commissions, both direct and override, by Mr. Blanchard, and the earning of fees for income tax preparation were completely interconnected and interdependent activities. Although Mr. Blanchard stated in his evidence that the income tax preparation would have been developed into a profitable business had it not been for the income tax audit of his affairs, the fact is that it was created to provide leads for the advisors, and to keep them in Mr. Blanchard's branch. The same staff worked on both the FCG business and the income tax preparation. The same premises and equipment were used. There were no separate accounts, and no effort has apparently ever been made to allocate expenses between the two types of income. I conclude that there was only one business, and that Mr. Blanchard was the proprietor of it: see Scales v. George Thompson and Company Limited,[1] Frankel Corporation v. M.N.R.,[2] and H. A. Roberts Ltd. v.Canada.[3]
[19] The result of finding there to be only one business is that the entitlement to ITCs falls to be determined under sections 169, 141 and 141.01 of the Act. Complex though these are, they may be summarized this way. Entitlement to ITCs arises only to the extent that goods and services tax has been paid on property or services that have been acquired for the purpose of making taxable supplies for consideration. Financial services are not taxable supplies. Where property or services have been acquired for the purpose of making both taxable and non-taxable supplies, an allocation must be made, and that allocation must be one that is fair and reasonable, and the same method must be used consistently. In the case of a person who is not a financial institution, where substantially all of the property or services are used in the course of activities other than commercial activities, then all the consumption or use is deemed to have taken place in the course of non-commercial activities, and so no allocation need be made.[4] In the case of a financial institution, an allocation is required.
[20] In the present case, Four Pillar was certainly a financial institution for its 1996 financial year, either under subparagraph 149(1)(a)(iii), because Mr. Blanchard's principal business was as a salesperson of securities, or under paragraph 149(1)(b) because more than 10% of his income came from financial revenue, in the form of commissions on the sale of securities. Paragraph 149(1)(b) had been amended before the start of Four Pillar's 1997 year, and would no longer apply, because the total revenue of Four Pillar was less than $10,000,000. Nevertheless, it remained a financial institution under subparagraph 149(1)(a)(iii).
[21] That brings me to the allocation. The assessor testified that she considered three possible methods of allocation. One method would trace the actual use of property and services used in the financial and non-financial activities. This could not be done because Four Pillar did not have records of the use to support such an allocation. Another method would apportion according to the expenditure of time and effort by the business on the activities. Mr. Blanchard argues for the use of this method and testified that the majority of the time and effort of him and his staff went into the tax preparation and collection functions. I do not accept that evidence. When the income statements are considered it seems very unlikely. In any event, his evidence on the point was both vague and uncorroborated, and I would not rely on it.
[22] The remaining method is to allocate in proportion to the contributions to revenue of the commercial and non-commercial activities. This is what the assessor did, and in my view it is the only appropriate way to allocate in the present case. For 1996, she allowed ITCs on the basis of 2.7% of the amount claimed, because the total revenue was $291,464, of which $7,934 was derived from tax preparation and the balance from commissions and other related sources. For 1997, the total revenue was $395,271, of which $1,127, or 0.28%, was derived from tax preparation. Applying the same method of allocation as for the 1996 year, Four Pillar is entitled to ITCs of $17.21 for the second period.
[23] The appeal is therefore allowed and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the Appellant is entitled to be credited an additional input tax credit of $17.21. There will be no order as to costs.
Signed at Ottawa, Canada, this 27th day of July, 2001
"E.A. Bowie"
J.T.C.C.
COURT FILE NO.: 2000-3620(GST)I
STYLE OF CAUSE: Andrew Blanchard o/a Four Pillar Financial and Her Majesty the Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: March 20 and May 25, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge E.A. Bowie
DATE OF JUDGMENT: June 7, 2001
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: Arnold Bornstein
COUNSEL OF RECORD:
For the Appellant:
Name: --
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada