Date: 20010308
Docket: 2000-498-GST-I
BETWEEN:
GESTION ALAIN ST-PIERRE INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Tardif, J.T.C.C.
[1] This is an appeal from a notice of assessment dated February 20, 1998, concerning the goods and services tax ("the GST") for the period from November 1, 1993, to October 31, 1997.
[2] The appellant is a management company incorporated by Alain St-Pierre, a pharmacist. Being subject to the regulations of his professional corporation, Mr. St-Pierre could not and still cannot practise his profession by assuming corporate status: he must be personally accountable for the actions he takes in his professional practice.
[3] However, the same is not true for the business activities related to the practice of his profession, such as the sale of food products, non-food products, cosmetics, perfumes, and so on; all those items could and can be sold through a company.
[4] In actual fact, Alain St-Pierre gained accreditation for the pharmacy, one part of which was used as the dispensary (the place where the drugs were sold, which was delimited by a psychological division) and the other, much larger, part of which was taken up by the stock of all the other products: food products, non-food products, over-the-counter drugs, cosmetics, perfumes, and so on.
[5] All the financial and business transactions of the pharmacy as a whole went through the account of Gestion Alain St-Pierre Inc.; as for Alain St-Pierre personally, he stated a number of times that he did not have his own account for the business of the pharmacy's two components.
[6] The accountant, Pierre Mercier, explained that he acted as a public accountant for a number of pharmacies and had built up valuable expertise in this area over the years. Indeed, the Court could see that he was very familiar with the accounting and regulatory aspects of the pharmaceutical field.
[7] He had a thorough grasp of the appellant's accounting file; it held no secrets for him. He explained that he had organized the appellant's accounting in accordance with the statutory and regulatory requirements of the pharmacists' professional corporation and had done so using a single bank account, the appellant's.
[8] He thus had a specific column under the heading [TRANSLATION] "lab" in which were entered all laboratory-related expenses and all were also shown as a percentage of the same items for the balance of the transactions related to the pharmacy's purely business activities.
[9] In this regard, the evidence clearly showed that there was a definite distinction between the business transactions and the dispensary or laboratory activities.
[10] At the end of the company's fiscal year, all the expenses for which Alain St-Pierre was personally responsible were separated from those for which Gestion Alain-St-Pierre Inc. assumed responsibility.
[11] However, the evidence showed that the appellant's accountant tended to play down the reality of the two juridical personalities, namely that of the appellant, Gestion Alain St-Pierre Inc., and that of Alain St-Pierre himself.
[12] On the basis that Alain St-Pierre owned all of the company's shares and was its only director and that the respective work and energies of Mr. St-Pierre and the company were devoted to the same pharmacy, the accountant—like his client, Mr. St-Pierre—seemed to consider the company to be basically an administrative and accounting requirement.
[13] This ambiguity also existed in other respects. Alain St-Pierre was hesitant when he had to answer questions about insurance, the lease and other agreements with third parties, since he did not know exactly whether, in a given case, he himself or the management company was a party, an intervener or a surety. The accountant testified that it would have been impossible, or at least very difficult and much more costly, to make periodic remittances given that the accounting did not provide for any interruptions during the year. In no way is that argument a valid one.
[14] When a taxpayer chooses to organize his or her affairs by incorporating a management company into them, the taxpayer must accept the consequences of that choice and above all comply with the requirements applicable to the chosen means by maintaining consistency given that two separate juridical personalities are involved. The argument based on the additional costs resulting from the existence of the two entities is clearly irrelevant and cannot be accepted.
[15] Taking advantage of the benefits and ignoring the inconveniences could well have effects contrary to those sought, since third parties will be justified in not taking the corporate status into account. Owning all the shares, being the sole director and carrying on businesses involved in more or less the same type of activity are not excuses for not meeting the fundamental requirements dictated by the reality of the existence of two distinct entities that are completely separate from each other, nor are they a means of evading those requirements.
[16] In the case at bar, if the accountant and Alain St-Pierre had really understood that inescapable reality, they would have set up a structure and above all one or more agreements that had the effect of separating and dividing up the two entities' respective areas of activity much more clearly. As a result, it would have been easier and above all simpler to assess and analyse each entity's rights and obligations.
[17] Starting from the premise that Alain St-Pierre and Gestion Alain St-Pierre Inc. were two separate and distinct entities, the parties could, and above all should, have prepared one or more agreements to define and set out each entity's rights and obligations. If they had done so, it would have been possible to quickly see that a mandate existed and especially to assess its content. It would also have been a consequence of such a separation that it would have been more appropriate to provide for periodic invoices to be issued for the management fees.
[18] Confusing the two entities may make it seem unnecessary to conduct certain transactions on the pretext that doing so has little effect and entails additional costs. These are in fact the reasons relied on by the appellant's accountant.
[19] Such an argument and such reasoning are not valid and are in no way acceptable to justify or explain the failure to make quarterly payments under the requirement to account for the taxes payable, which is why the Court refuses to go along with the arguments put forward by the appellant, which had to and will have to comply in this regard with the Excise Tax Act, which provides for periodic payments.
[20] Moreover, the appellant made the same mistake in asserting that it was pointless and unnecessary to consider the management service a taxable supply because Alain St-Pierre could subsequently claim the amount of taxes he paid as an input. Once again, to support such reasoning, the reality of the two separate juridical personalities would have to be completely disregarded.
[21] What about the assessment at issue in this appeal? There is no doubt that the fees billed by the appellant to Alain St-Pierre were indeed taxable supplies. Does this mean that such taxable supplies had to include all the components, which for the years at issue totalled $1,142,199, the amount on which the assessment was based?
[22] The evidence showed that the appellant had taken on various obligations that were Alain St-Pierre's personally in his capacity as a pharmacist. This is clear from Exhibit A-7. I consider it useful to reproduce the content of that exhibit:
[TRANSLATION]
Gestion Alain St-Pierre Inc.
for Alain St-Pierre, pharmacist
Breakdown of management services for the pharmacist
$ Taxable Non-taxable
Year % expenses expenses Fees Total
1994 $ 63,225 166,360 69,602 299,187
% 21.13 55.61 23.26 100.00
1995 $ 64,655 214,481 44,175 323,311
% 20.00 66.34 13.66 100.00
1996 $ 82,692 268,190 48,815 399,697
% 20.69 67.10 12.21 100.00
1997 $ 97,291 270,353 51,547 419,191
% 23.21 64.49 12.30 100.00
1998 $ 110,180 336,719 62,535 299,187
% 21.63 66.10 12.27 100.00
TOTAL $ 418,043 1,256,103 276,674 1,950,820
% 21.43 64.39 14.18 100.00
[23] Counsel for the appellant argued that the appellant had a tacit mandate from its sole shareholder, Alain St-Pierre, to carry out certain transactions. If such a mandate had been expressly agreed on, there would no doubt have been no dispute and the assessment made on the basis of the single item would most likely not have led to litigation.
[24] Absent a written mandate, can the appellant argue that it acted pursuant to a tacit mandate?
[25] I consider it helpful to reproduce articles 2130 and 2132 of the Civil Code of Québec, which deal with mandate:
2130 Mandate is a contract by which a person, the mandator, empowers another person, the mandatary, to represent him in the performance of a juridical act with a third person, and the mandatary, by his acceptance, binds himself to the exercise the power.
The power and, where applicable, the writing evidencing it are called the power of attorney.
2132 Acceptance of a mandate may be express or tacit. Tacit acceptance may be inferred from the acts and even from the silence of the mandatary.
[26] Although it would have been preferable to have a written mandate that clearly defined the scope of the parties' rights and obligations, I do not think that it can be concluded on the evidence that there was no mandate at all.
[27] The appellant's raison d'être and fundamental role were to take on certain responsibilities that normally would have fallen on Alain St-Pierre personally, and that reality alone indicates that there was a tacit or at least a presumed mandate.
[28] In addition to that reality, there is the fact that the appellant was to and did in fact receive fees for carrying out the financial transactions. The payment of fees confirms the mandate's existence. Finally, the evidence showed that Alain St-Pierre relied completely and utterly on the appellant to handle all business and financial transactions and indicated as well that he had no bank account in his name.
[29] In my view, these factors are a sufficient basis for finding that there was indeed a mandate between the appellant and its sole shareholder, Alain St-Pierre. It was a tacit mandate carried out for a fee.
[30] What about the content of that mandate? Once again, a written mandate would have allowed for clarity and transparency as far as the content was concerned. Without such a written mandate, the situation was ambiguous and equivocal, especially since certain accounting items were confusing—and this was the case even though the accountant explained that he was obliged to comply with his professional corporation's instructions on terminology use. I am referring in particular to the [TRANSLATION] "Management Fees" item, which, according to the evidence, did not correspond at all with the content of that item. Indeed, the evidence showed that that item included expenses that had nothing to do with the heading used. The terms employed misled the respondent, since it was possible and plausible that everything under that item was part of the management fees, given that the finer points and realities should normally have been the subject of an express agreement.
[31] As regards the determination of the content of the mandate between the appellant and its sole shareholder, Alain St-Pierre, the evidence showed that Mr. St-Pierre had approached the respondent's officials to find out what his obligations were. In reliance on the information obtained, Mr. St-Pierre—in concert with his accountant—had personally decided not to register, his argument being that there were no tax consequences since, if he had registered, he would in any event have received a refund of the amounts paid. In addition to those considerations, the appellant indicated that most of the sales were non-taxable supplies because they involved drugs.
[32] The assessment under appeal was made in a very simple way: for the period at issue, the auditors basically added up the amounts listed under "Management Fees" and assessed the appellant on the total thus obtained, adding interest and penalties. The appellant's accountant would have liked the auditors to do an in-depth analysis. In other words, he would have liked the respondent not to take account of what he himself had described, defined and identified. The accountant advanced an absurd and totally unacceptable argument in asserting that the heading or item chosen did not correspond with the content. On that basis, the accountant argued that the respondent should not have taken account of the item chosen and should have assessed on the basis of the content contradicted by the heading.
[33] That argument is not valid, especially since the accountant himself was the one who created, as it were, the means chosen.
[34] The appellant tried unsuccessfully to show the respondent's analysts and auditors that the item "Management Fees" included components that had nothing to do with the work and fees associated with management. In this regard, the appellant greatly contributed to, encouraged and inspired the respondent's approach by itself defining and describing the assessed amounts as management fees.
[35] The evidence adduced by the appellant therefore sought mainly to prove that, although things were clearly set out and worded in the financial statements under the item "Management Fees", elements were included that had nothing to do with the heading used in those statements.
[36] In light of the evidence adduced, it appears that the appellant has partly discharged its burden of proof by showing on a balance of probabilities, first, that two of the three components of the item "Management Fees" were not actually part of that item, and second, that the appellant had assumed responsibility for them as part of its tacit mandate.
[37] On the other hand, it appears that the management fees, which were set at about 15 percent, were indeed taxable supplies.
[38] As regards the interest, this Court has no authority to intervene where the assessment was made correctly. With respect to the applicable penalties resulting from the impending assessment arising out of this judgment, there is no reason or evidence that justifies not assessing them.
[39] Accordingly, the appeal should be allowed to the extent that only the actual management fees constituted taxable supplies.
[40] For these reasons, the appeal is allowed to the extent that only the actual management fees constituted taxable supplies. As for the applicable penalty on the supplies determined to be taxable by this judgment, it was fully justified. The same is true of the interest.
Signed at Ottawa, Canada, this 8th day of March 2001.
"Alain Tardif"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 23rd day of July 2001.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
2000-498(GST)I
BETWEEN:
GESTION ALAIN ST-PIERRE INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on October 18, 2000, at Québec, Quebec, by
the Honourable Judge Alain Tardif
Appearances
Counsel for the Appellant: Pierre Hémond
Counsel for the Respondent: Louis Cliche
JUDGMENT
The appeal from the assessment made under Part IX of the Excise Tax Act, notice of which is dated February 20, 1998 and bears number 7214044, for the period from November 1, 1993 to October 31, 1997, is allowed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 8th day of March 2001.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 23rd day of July 2001.
Erich Klein, Revisor