[OFFICIAL ENGLISH TRANSLATION]
97-2016(IT)I
BETWEEN:
VIATEUR CHÉNARD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on March 2, 1998, at Québec, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
For the Appellant: The appellant himself
Counsel for the Respondent: Anne-Marie Boutin
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1992 and 1993 taxation years are allowed, without costs, so that the Minister can reassess the appellant on the basis of the admissions referred to in paragraph 10 of the attached Reasons for Judgment. For 1994, the appeal is dismissed.
Signed at Ottawa, Canada, this 30th day of June 1998.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Date: 19980630
Docket: 97-2016(IT)I
BETWEEN:
VIATEUR CHÉNARD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx, J.T.C.C.
[1] These are appeals under the informal procedure from reassessments made by the Minister of National Revenue ("the Minister") under section 253 of the Excise Tax Act ("the Act") for the 1992, 1993 and 1994 taxation years.
[2] Section 253 provides that, where the goods and services tax is payable by an individual who is an employee of a registrant or a member of a partnership that is a registrant, that individual is entitled to a rebate-calculated using the formula set out in the section-for the tax paid in connection with expenses that are deductible in computing the individual's income from the partnership.
[3] The rebate provided for in section 253 is for expenses incurred by the individual to earn income from his or her employment or from the partnership, expenses for which the individual has not been reimbursed by the employer or the partnership and which are deductible in computing the individual's employment or partnership income under the Income Tax Act.
[4] Subsection 253(5) of the Act provides that, where an individual files an application for a rebate under section 253, assessments of the amount of the rebate and appeals, if any, are governed by the provisions of the Income Tax Act.
[5] This appeal involves a partner, and I will no longer refer to anyone other than an individual who is a partner. The issue is whether the expenses for which the appellant is claiming a tax rebate were incurred to earn income from the partnership.
[6] The facts on which the Minister relied in making his reassessments are set out in paragraph 5 of the Reply to the Notice of Appeal (the "Reply") as follows:
[TRANSLATION]
a. during the taxation years at issue, the appellant claimed the employee and partner goods and services tax rebate on the basis of the following amounts:
1992 1993 1994
Net expenses eligible
for the rebate $21,088.38 $22,292.73 $22,463.62
Rebate claimed $1,379.61 $1,458.40 $1,469.58
b. during the taxation years at issue, the appellant and his wife owned 50 percent of a franchise in Phyto Centre de Lévis Enrg. ("the partnership");
c. during the taxation years at issue, the appellant, through the partnership, provided services to Titrex International Ltée for which he received discounts and/or management fees;
d. during the taxation years at issue, the partnership was not a business registered for GST purposes;
e. moreover, the expenses on which the claim is based are the partnership's expenses;
f. the employee and partner goods and services tax rebate was adjusted to nil under section 240 and subsection 253(1) of the Excise Tax Act for the 1992, 1993 and 1994 taxation years.
[7] With respect to subparagraph 5(b) of the Reply, counsel for the respondent told the Court that, in view of explanations given by the appellant the morning of the hearing, that subparagraph should state that the appellant and his wife and/or other partners owned 25 to 50 percent.
[8] With respect to subparagraph 5(d) of the Reply, based once again on the explanations given the same morning, counsel for the respondent accepted that the partnership had changed its name by removing the abbreviation "Enrg". There was indeed a partnership called Phyto Centre de Lévis that was a registrant in 1992 and 1993. In 1994, it was dissolved and converted into a corporation.
[9] The statement in subparagraph 5(e) of the Reply was explained by Thérèse Racine, an auditor for Revenue Canada. She explained that, according to an administrative agreement with Customs and Excise officials, the input tax credit will be granted to the partnership for the expenses incurred by it. The individual rebate under section 253 will be granted for certain expenses incurred by the partners themselves, such as food and car expenses. That is the way subparagraph 5(d) of the Reply must be read, since, for section 253 to apply, the expenses for which a tax rebate is claimed must have been incurred to earn income as a partner.
[10] At the start of the hearing, counsel for the respondent made certain admissions. After hearing the appellant's testimony, she wondered whether those admissions were accurate given that the expenses in question were incurred to earn commission income as a self-employed worker and not as a partner. In any event, she put the admissions down in writing. They are as follows:
[TRANSLATION]
In light of the facts she learned before the hearing, the respondent was prepared to admit that the appellant could claim a GST rebate for certain expenses. She told the Court so as soon as the hearing began.
The respondent therefore admitted that the appellant could claim a GST rebate for the following expenses:
1992
70% of oil and gasoline expenses: $1,770.09
70% of maintenance and repair expenses: $1,486.10
70% of capital cost allowance: $3,237.50
Total expenses and capital
cost allowance eligible for
the GST rebate: $6,493.69
1993
70% of gasoline expenses: $1,351.79
70% of maintenance and repair expenses: $977.95
70% of capital cost allowance: $3,481.84
Total expenses and capital
cost allowance eligible for
the GST rebate: $5,811.58
[11] The appellant is the vice-principal of a school, and in 1992, his employment income was $57,037.11. He told the Court that in 1990, the partnership Phyto Centre de Lévis had purchased, for $25,000, a franchise from Les Produits Naturels Titrex International Limitée ("Titrex") to distribute plant-based products. He said that Phyto Centre de Lévis had a receptionist for a short period of time in 1993 but that otherwise the partners took turns handling reception duties. The centre was open three days a week from 5:00 p.m. to 10:00 p.m. so that the partners could recruit salespersons and the products could be distributed. The salespersons and partners came to the centre to stock up and then sold the products to the public. The centre was not open to the public.
[12] The partnership's expenses amounted to $11,156 in 1992, as shown by Exhibit I-1. According to the appellant's testimony at page 36 of the transcript, those were the only expenses that had to be shared by the partners.
[13] As the appellant explained, the partners could each personally, depending on how motivated they were, incur the expenses they considered useful to earn "royalties" paid by Titrex. Those "royalties" were not shared by the other partners, and the expenses were not reimbursed by the partnership. The appellant received a commission of five percent on the sales made by the salespersons he had recruited and on those he made himself. Those amounts were paid to him monthly and had nothing to do with his share in the partnership.
[14] The appellant earned $14,969.37 in "royalties" from Titrex in 1992. However, his expenses amounted to $21,088.38. In addition to those expenses, Phtyo Centre de Lévis had $11,156 in expenses for the same year. The partnership's profit was $597.41. It was divided between the four partners, who each received $149.35. The final result of the appellant's businesses in 1992 was a loss of $7,052.53, which was deducted from his employment income.
[15] The partnership's expenses and income were divided among the partners. The expenses incurred by the appellant were not shared by the other partners, nor did they share in his "royalties".
[16] The appellant drew the Court's attention to article 5 of the partners' agreement, which reads as follows:
[TRANSLATION]
Art. 5 DUTY OF PARTNER
To remain a full member of the partnership, each partner shall maintain a minimum monthly volume of 500 sales points at all times. If that obligation is not met by a partner, the partner's share of the income normally divided equally among the partners shall be withdrawn from the partner and redistributed among the other partners for as long as the partner is in default. This situation does not make the partner any less liable to pay the phyto-centre's monthly expenses.
[17] He therefore argued that the expenses he incurred personally were expenses to maintain his status as a partner and thus to earn income as a partner.
[18] Counsel for the respondent argued that the expenses in question were incurred for the business of a commission salesperson and not for the business of a member of a partnership that was a registrant.
[19] As a supplier of services, a self-employed worker may be a registrant, but this was not the case of the appellant; this situation obviously involves provisions of the Act other than the provision concerning the tax rebate for a member of a partnership that is a registrant. That rebate is provided for in section 253 of the Act, set out below.
[20] Section 253 of the Act reads as follows:
253. (1) Where
(a) a musical instrument, motor vehicle, aircraft or any other property or a service is or would, but for subsection 272.1(1), be regarded as having been acquired, imported or brought into a participating province by an individual who is
(i) a member of a partnership that is a registrant, or
(ii) an employee of a registrant (other than a listed financial institution),
(a.1) in the case of an individual who is a member of a partnership, the instrument, vehicle, aircraft or other property or service acquired, imported or brought into a participating province was not acquired or imported by the individual on the account of the partnership,
(b) the individual has paid the tax (in this subsection referred to as the "tax paid by the individual") payable in respect of the acquisition or importation of the property or service, or the bringing into a participating province of the property, as the case may be, and
(c) in the case of an acquisition, importation or bringing into a participating province, of a musical instrument, the individual is not entitled to claim an input tax credit in respect of the instrument,
the Minister shall, subject to subsections (2) and (3), pay a rebate in respect of the property or service to the individual for each calendar year equal to the amount determined by the formula
A X (B-C)
where
A is
(a) where the tax paid by the individual includes only tax imposed under subsection 165(1) or section 212 or 218, 7/107,
(b) where the tax paid by the individual does not include any tax imposed under any of those provisions, 8/108, and
(c) in any other case, 15/115;
B is an amount equal to
(a) the capital cost allowance in respect of the instrument, vehicle or aircraft,
(b) the amount in respect of the acquisition and importation of the other property imported by the individual (not exceeding the total of the value of that property determined under section 215 and the tax calculated on it), or
(c) the amount in respect of
(i) the supply by way of lease, licence or similar arrangement of the instrument, vehicle or aircraft,
(ii) the supply of the service, or
(iii) the supply in Canada of the other property,
as the case may be, that was deducted under the Income Tax Act in computing the individual's income for the year from an office or employment or from the partnership, as the case may be, and in respect of which the individual did not receive an allowance from a person, other than an allowance in respect of which the person certifies, in prescribed form containing prescribed information, that, at the time the allowance was paid, the person did not consider
(d) the allowance to be a reasonable allowance for the purposes of subparagraph 6(1)(b)(v), (vi), (vii) or (vii.1) of that Act, or
(e) where that person is a partnership of which the individual is a member, that the allowance would be a reasonable allowance for the purposes of subparagraph 6(1)(b)(v), (vi), (vii) or (vii.1) of that Act if the individual were an employee of that partnership at that time.
C is the total of all amounts that the individual received or is entitled to receive from the individual's employer or the partnership, as the case may be, as a reimbursement in respect of the amount that was so deducted.
253(2) Restriction on rebate to partner - The rebate in respect of property or a service payable under subsection (1) for a calendar year to an individual who is a member of a partnership shall not exceed the amount that would be an input tax credit of the partnership in respect of the property or service for the last reporting period of the partnership in its last fiscal year ending in that calendar year if ...
...
253(3) Application for rebate - A rebate for a calendar year shall not be paid under subsection (1) to an individual unless, within four years after the end of the year, the individual files an application for the rebate in prescribed form containing prescribed information with the Minister with a return of the individual's income under Part I of the Income Tax Act.
253(5) Administration of rebates - Where an individual files an application for a rebate under this section,
(a) subsections 160.1(1) and 164(3), (3.1) and (4) of the Income Tax Act apply, with such modifications as the circumstances require, for the purposes of calculating interest on the rebate or any overpayment of the rebate as if the rebate or the overpayment were a refund of tax paid under Part I of that Act or an overpayment of such a refund, as the case may be, and, for those purposes, subsection 280(1) does not apply to the rebate; and
(b) sections 165 to 167 and Division J of Part I of the Income Tax Act apply, with such modifications as the circumstances require, to objections to and appeals from an assessment of the amount of the rebate as if it were an assessment of tax payable under Part I of that Act, and sections 301 to 311 do not apply to the assessment.
(Emphasis added.)
[21] Subsection 253(1) of the Act requires that the consideration for the supply of the property or service be deductible in computing the individual's income from the partnership. In other words, the expense must be deductible by the individual in computing his or her income from the partnership. Here, however, the evidence clearly showed that the expenses were incurred not to earn income from the partnership but to earn income as a self-employed worker. This is clear from the fact that the substantial expenses and "royalty" income were not divided among the partners. If it has the meaning the appellant has given it, Article 5 of the partners' agreement to which the appellant referred does not alter the nature of the expenses. The expenses relate not to the partnership's business but to the appellant's. For 1994, there is the additional reason that the appellant was not a member of a partnership that was a registrant but, rather, was a shareholder given that the partnership had been abandoned and a corporation had been formed.
[22] For 1992 and 1993, the appeals are allowed so that the Minister can reassess the appellant on the basis of the admissions referred to in paragraph 10 of these Reasons. For 1994, the appeal is dismissed.
Signed at Ottawa, Canada, this 30th day of June 1998.
|
"Louise Lamarre Proulx" |
J.T.C.C.