98-1359(GST)I
BETWEEN:
D & P HOLDINGS LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on August 11, 1999 at St. John's, Newfoundland, by
the Honourable Judge D. Hamlyn
Appearances
Agent for the Appellant: Fred Drover
Counsel for the Respondent: Marcel Prevost
JUDGMENT
The appeal from the assessment made under the Excise Tax Act, notice of which is dated December 11, 1996 and bears number 01BA0201256 is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 25th day of August 1999.
|
"D. Hamlyn" |
J.T.C.C.
Date: 19990825
Docket: 98-1359(GST)I
BETWEEN:
D & P HOLDINGS LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hamlyn, J.T.C.C.
[1] This is an appeal with respect to a Notice of Assessment by a registrant under the Excise Tax Act (the "Act") wherein the Appellant is alleged to have underreported its Goods and Services Tax ("GST") collectible and overstated its Input Tax Credits ("ITCs").
[2] By Notice of Assessment numbered 01BA0201256 dated December 11, 1996, the Minister of National Revenue (the "Minister") advised the Appellant that he had assessed its GST liability for the period from June 1, 1991 to August 31, 1996 as follows:
Increase of GST Collectible $35,133.84
Plus: Decrease of Input Tax Credits $ 7,999.96
Total Net Tax Adjustments $43,133.80
Penalty $ 5,911.07
Interest $ 4,859.40
Total Assessment $53,904.27
APPELLANT'S POSITION
[3] The Appellant's position is that it was a registrant under the Act whose principal activity was the provision of commercial rents and the operation of a parts department of a furniture company.
[4] The Appellant explained the deficiencies in the reported GST and ITCs were attributable in part to record destruction beyond the Appellant's control. Secondly, the Appellant maintained that GST liability in relation to a property conveyance was not established and thirdly that the mortgagee of the Appellant's property (Royal Trust) was responsible for GST during periods when the mortgagee received attornments of rent or when the mortgagee was in control of the Appellant's property under seizure or repossession.
RESPONDENT'S POSITION
[5] In assessing the Appellant for the period from June 1, 1991 to August 31, 1996, the Minister made the following assumptions of fact:
...
(b) at all relevant times the Appellant was registered under Part IX of the Excise Tax Act (the "Act");
(c) the Appellant's principal activity was the provision of commercial rents;
(d) the Appellant's books and records for the said period were incomplete;
(e) in filing its quarterly GST returns for the period from June 1, 1991 to August 31, 1996, the Appellant reported GST Collectible and Input Tax Credits ("ITC's") as follows:
GST Collectible: $26,588.57
Less: ITC's: ($44,538.15)
Total Net Tax (Credit): ($17,949.58)
(f) the Appellant underreported its GST Collectible by the amount of $35,133.84 for the period from June 1, 1991 to August 31, 1996;
(g) the Appellant overstated its ITC's by the amount of $7,999.96 for the period from June 1, 1991 to August 31, 1996;
(h) the underreported GST Collectible for $35,133.84 relates to taxable supplies made by the Appellant, within the meaning of subsection 123(1) of the Act, during the period from June 1, 1991 to August 31, 1996 and the said amount can be attributed as follows:
Source/Taxable Supply GST Collectible
Discrepancies: Books and Records $23,180.59
Automobile Standby Charge $ 2,129.30
Automobile Operating Cost $ 396.13
Disposal of Real Property $ 7,640.70
Commercial rent revenue $ 378.80
Commercial rent recoveries $ 1,408.32
Total: $35,133.84
(i) the Appellant's automobile was utilized 60 per cent for business purposes and 40 per cent for personal purposes;
(j) during August, 1992, the Appellant made a taxable supply of real property to a recipient who was not registered under Part IX of the Act for consideration in the amount of $109,152.80;
(k) the Appellant was required to collect the GST at the rate of 7% on the consideration amount referred to in the preceding subparagraph;
(l) during December, 1995, the Appellant made a taxable supply by way of rental of real property for consideration in the amount of $5,411.50;
(m) the Appellant was required to collect the GST at the rate of 7% on the consideration amount referred to in the preceding subparagraph;
(n) during the period from June 1, 1991 to August 31, 1996, the Appellant failed to remit GST totalling $1,408.32 on recoveries and receivables attributable to the provision of commercial rent by the Appellant; and
(o) the Appellant did not maintain adequate documentation to support its claim for the ITC's referred to in subparagraph 5(g) above.
ISSUES
[6] The issues to be decided are:
(a) whether the Appellant's GST liability was correctly assessed by the Minister; and
(b) whether the Appellant is liable for the amount assessed in respect of penalty and interest under subsection 280(1) of the Act.
ANALYSIS
SUFFICIENCY OF APPELLANT'S BOOKS AND RECORDS
[7] The Notice of Appeal that was incorporated as part of the viva voce evidence of the Appellant's agent reads in part as follows:
... [B]ackground information concerning both my companies, one a furniture company (Ropewalk Enterprises Limited) and the other (D & P Holdings Limited) the owner of a retail building in St. John's and a retail building in Grand Falls, Newfoundland. In the early 1990's, the furniture company was having major problems.
...
During 1991, 1992, 1993, 1994 and 1995 considerable financial difficulty continued and the furniture company closed its doors in 1993/94. ... In 1991/92, I had transferred the parts department into D & P Holdings Limited but inadvertently continued to report the parts department sales for RST and GST purposes through my furniture company. To further complicate matters, when Royal Trust took possession of the building and I was forced from my office and the building, they destroyed or sent to the garbage all the accounting records belonging to the furniture company which had been in storage. ...
... [T]hat during these financial difficulties, Royal Trust had their solicitor seize the rent payment from my tenants including the GST. These cheques were made payable not to D & P Holdings but to Royal Trust.
[8] The same witness, at the outset of the hearing as part of the evidence, read a prepared statement, which in part read:
[T]he Deputy Attorney General states that my books and records for the period were incomplete. Let me state here that my books and records were anything but incomplete. My GST returns were totally accurate; they were calculated as follows:
Because the holding company did not have an RST number, the Parts Department Retail Sales Tax and GST, both revenue and ITC's, were submitted on the operating company (Great Eastern Furniture, operated by Ropewalk Enterprises Ltd.). The discrepancies that Revenue Canada indicates is a difference between my books and records and my returns were simply the transfer of the Parts Department from my operating to my holding company. Naturally, the GST returns for the holding company would not balance with my financial statements.
... [T]he financial statements were done some five years later, and by this time, without my knowledge and/or approval, Royal Trust Corporation had destroyed all the documentation belonging to the operating company. The operating company filed all its records on the first floor of the building, while the holding company filed its records in my private office on the second floor of the same building. As the records stored on the first floor were destroyed without my knowledge and/or approval, as I have already stated, I could not provide documentary evidence to disprove Revenue Canada's contention of a discrepancy.
[9] The Appellant also called as a witness a former employee of the furniture company who stated that she acted as cashier and did certain office work that involved the recording of the Retails Sales Tax ("RST") and GST. She also stated calculations for RST and GST were prepared once per month. The witness said some of the records were kept downstairs in the furniture store and some upstairs in the Appellant's agent's office.
[10] The requirements for the keeping of books and records for the purposes of GST are set forth in subsection 286(1). It reads:
Every person who carries on a business or is engaged in a commercial activity in Canada, every person who is required under this Part to file a return and every person who makes an application for a rebate or refund shall keep records in English or in French in Canada, or at such other place and on such terms and conditions as the Minister may specify in writing, in such form and containing such information as will enable the determination of the person's liabilities and obligations under this Part or the amount of any rebate or refund to which the person is entitled.
[11] The auditor for the Minister in an audit of the Appellant found by analysis of the financial statements that the Appellant underreported GST in the sum of $23,180.59. The auditor concluded the underreporting was attributed to discrepancies in books and records and in particular the books and records were incomplete. The balance of the unreported GST collectible was in relation to automobile standby charges, operating costs, disposal of real property, commercial rent revenue and commercial rent recoveries.
[12] The auditor also found that ITCs were overstated and the overstatements could not be supported by adequate documentation.
[13] Subsection 169(4) of the Act reads as follows:
169(4) Required documentation - A registrant may not claim an input tax credit in respect of a supply of property or a service for a reporting period unless, before filing the return in which the credit is claimed,
(a) the registrant has obtained sufficient evidence in such form containing such information as will enable the amount of the input tax credit to be determined, including any such information as may be prescribed; and
(b) where the property is real property supplied by way of sale to the registrant in circumstances in which subsection 221(2) applies, the registrant has filed the return required to be filed under subsection 228(4) with respect to the supply.
[14] An ITC is a credit given to registrants for tax paid or payable on inputs they purchase for use in commercial activity. Subsection 169(1) governs the computation of ITCs and subsection 225(1) indicates that these credits are to be deducted from the GST payable prior to being remitted to the Receiver General.
[15] Subsection 169(4) outlines the documentation requirements associated with ITCs. As a result of this provision, a registrant must provide sufficient evidence to determine the amount of the ITCs, plus any information prescribed by regulation. Such prescribed information is outlined in the Input Tax Credit Information Regulations (the "Regulation"), section 3.
[16] The Regulation defines "supporting documentation" as used in section 3 to include an invoice, a receipt, a credit-card receipt, a debit note, a book or ledger of account, a written contract or agreement, any record contained in a computerized or electronic retrieval or date storage system, and any other document validly issued or signed by a registrant in respect of a supply made by the registrant in respect of which there is tax paid or payable. The Appellant was unable to supply supporting documentation for the overstated ITCs.
[17] The Appellant chose not to subpoena or call witnesses from the Royal Trust whose agents were the apparent active and operating control behind the alleged destruction of the records of the Appellant and the furniture company.
[18] The Appellant also chose not to subpoena or call witnesses from Deloitte & Touche. Deloitte & Touche allegedly prepared the Appellant's financial statements and were the advisers behind the parts department transfer to the Appellant. The Appellant's agent simply states 'I kept complete records and the discrepancies in GST and ITCs can be examined by the transfer of the parts department of the furniture company to the Appellant corporation.' Nothing more by way of substantive evidence to support this assertion was tendered.
[19] I also conclude that during the period under review the financial affairs of the Appellant appeared to be as described difficult and somewhat chaotic. Finances were a continuing concern. The records were not all kept in one office.
[20] The Appellant because of finances had been through difficult relations with Royal Trust and this pattern continued. The Appellant knew Royal Trust had distress rights under the mortgage in the event of non-payment of the mortgage and such distress rights placed the Appellant's property at risk.
[21] A necessary incident of books and record keeping includes the safe keeping and protection of books and records.
[22] I am not satisfied on the evidence before the Court that the discrepancies in relation to GST and ITC can be explained by the alleged destruction of the furniture company records.
[23] The obligations under subsection 169(4) and subsection 286(1) of the Act have not been met.
REMEDIES OF MORTGAGEE UPON DEFAULT
AND CONSEQUENCES THEREOF
[24] The Appellant's witness suggested on two occasions Royal Trust took control of the rents and therefore should be responsible for GST remittance.
[25] The first period of time was a period of attornment of rents.
[26] The second period of time, 1995, was a period of seizure or repossession.
(I) ATTORNMENT OF RENTS - THE FIRST PERIOD (BEFORE 1995)
[27] Under default of a mortgage, the mortgagee has the right to possession as an interim measure pending payment, foreclosure or sale and can require any tenants of a mortgagor to attorn. The mortgagee in possession may remain in possession and attorn any rents until payment of the mortgage is made.[1] Where a creditor has attorned the rents of a debtor's property, the debtor is still the supplier of the property.[2]
[28] I conclude, for the first period of time before 1995, the Appellant remained the supplier when the rents were attorned. The Appellant was liable to remit the tax on rent of the commercial property during the period of attornment of rents.
(II) SEIZURE OR REPOSSESSION - THE SECOND PERIOD (1995)
[29] Seizure or repossession during the execution process under the default provisions of the mortgage deprives the Appellant control over the Appellant's property. During this period of time, Royal Trust was in control of the property. According to the evidence, the Appellant was not assessed for this period of time.
THE SUPPLY OF RENTAL OF REAL PROPERTY IN DECEMBER 1995
[30] The Minister assumed the Appellant made a taxable supply by way of rental of real property for consideration in the amount of $5,411.50 on December 1, 1995 and the Appellant was required to collect the GST on the consideration.
[31] The Appellant's evidence was that the rents were collected prior to December 1995 by Royal Trust.
[32] Until November 28, 1995, Royal Trust, as mortgagee of a mortgage in default, was in control and managed the subject property.
[33] Exhibit A-1 shows the settlement between the tenant and Royal Trust for the rents for December. The rents were to be inclusive of tax.
[34] On November 28, 1995, the Appellant once again took over the ownership, control and management of the real property.
[35] Royal Trust, according to the Appellant's agent, was not prepared to have any adjustments in the take-over of the property by the Appellant. There was no accounting to the Appellant by Royal Trust for the GST collected by Royal Trust with respect to the prepaid rents. The Appellant accepted this and took over the property, as stated, on November 28, 1995.
[36] I conclude on the evidence on December 1, 1995 the Appellant supplied a taxable supply and was required to collect and remit the GST payable by the recipient of the taxable supply.
DISPOSITION OF REAL PROPERTY
[37] The Minister assumed the Appellant, during August 1992, made a taxable supply of real property to a recipient who was not registered under Part IX of the Act for consideration in the amount of $109,152.80 net of tax.
[38] The Appellant's chief witness stated in the early 1990's when the furniture company was having problems the Grand Falls, Newfoundland, store was closed and the building was put up for sale.
[39] The building was disposed of to an individual by way of an agreement between Royal Trust (the mortgagee), the Appellant and the purchaser wherein the purchaser would take over the obligation of the Appellant on the mortgage as full consideration of the disposition.
[40] The purchaser apparently intended to open in the property a used furniture outlet. The purchaser was not a GST registrant at the time of the disposition.
[41] The Appellant did not collect the tax under Division II payable by the recipient in respect of purchase.
[42] Under subsection 165(1), the recipient of a taxable supply is required to pay tax equal to 7% of the value of the consideration for the supply. Under section 221, the supplier of a taxable supply is required to collect the tax payable by the recipient of the supply. The relevant parts of section 221 read as follows:
(1) Every person who makes a taxable supply shall, as agent of Her Majesty in right of Canada, collect the tax under Division II payable by the recipient in respect of the supply.
(2) A supplier (other than a prescribed supplier) who makes a taxable supply of real property by way of sale is not required to collect tax under Division II payable by the recipient in respect of the supply where
(a) the supplier is a non-resident person or is resident in Canada by reason only of subsection 132(2);
(b) the recipient is registered under Subdivision d and the supply is not a supply of a residential complex made to an individual; or
(c) the recipient is a prescribed recipient.
[43] The Appellant made a taxable supply of real property in August 1992 to a recipient (the purchaser) who was not a GST registrant. The Appellant was required to collect the GST on the consideration. The Appellant underreported GST collectible of $7,640.70 in the supply of the building in Grand Falls, Newfoundland.
SUMMARY
[44] From the Respondent's audit the conclusion is the Appellant underreported GST collectible by the amount of $35,133.84 and overstated its ITCs by the amount of $7,999.96 for the period from June 1, 1991 to August 31, 1996.
[45] The Appellant did not maintain books and records as required by subsection 286(1).
[46] The Appellant did not maintain adequate documentation to support the ITCs claimed (subsection 169(4)).
[47] During December 1995, the Appellant made a taxable supply of rental of real property for consideration in the amount of $5,411.50.
[48] The Appellant made a taxable supply of real property (conveyance of the Grand Falls property in August 1992) to a recipient who was not a GST registrant for consideration in the amount of $109,152.80 (net of tax).
[49] The balance of the assessment as found in paragraph (h) of the Minister's assumptions, the Appellant did not dispute.
PENALTIES AND INTEREST
[50] The Appellant submits:
... [B]ecause of the stated circumstances and because through no fault of its own, as the court [the law] did give its permission for Royal Trust to do what it did, there are parts of the Returns that cannot be supported by documentation. If this was approved by the courts[the law], how can a taxpayer be held liable?
Because of the foregoing, I ... question how the company can be held liable for any outstanding penalties and interest under ... subsection 280(1) of the Act.
[51] From the evidence of the Respondent's auditor as well as the foregoing review of evidence, I cannot conclude the Appellant kept meticulous books. The financial circumstances and financial affairs for the period in question were difficult and as I have concluded chaotic.
[52] The Appellant, given the continuing crisis situation, knew or should have known the property was subject to seizure, i.e., the books and records were at risk. I cannot conclude the Appellant exercised reasonable care to ensure its books and records be preserved.
[53] The Appellant's placing of its problems in relation to GST and ITCs on records at the doorstep of Royal Trust or its agents, I find is misplaced.
[54] I cannot conclude the Appellant's actions meet the test of due diligence in terms of penalties and interest.
DECISION
[55] The appeal is dismissed.
Signed at Ottawa, Canada, this 25th day of August 1999.
|
"D. Hamlyn" |
J.T.C.C.
COURT FILE NO.: 98-1359(GST)I
STYLE OF CAUSE: Between D & P Holdings Limited and
Her Majesty The Queen
PLACE OF HEARING: St. John's, Newfoundland
DATE OF HEARING: August 11, 1999
REASONS FOR JUDGMENT BY: The Honourable D. Hamlyn
DATE OF JUDGMENT: August 25, 1999
APPEARANCES:
Agent for the Appellant: Fred Drover
Counsel for the Respondent: Marcel Prevost
COUNSEL OF RECORD:
For the Appellant:
Name: --
Firm: --
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
[1] Frank Bennet, Bennett on Creditors' and Debtors' Rights and Remedies, 4th ed., Carswell, at page 357.
[2] David Schlesinger, GST in Hard Times, Canadian Tax Foundation, 1992 Conference Report, pages 44:1 and 44:2. See also Joseph v. Newman, (1927) 31 O.W.N. 400 (H.C.) aff'd 31 O.W.N. 429 (A.D.).