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Docket: 2002-3335(GST)I |
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BETWEEN: |
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HEART DROP 2000 DISTRIBUTORS INC., |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
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Appeal heard on March 26, 2003, at Kingston, Ontario, by
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the Honourable Judge Campbell J. Miller |
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Appearances: |
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Counsel for the Appellant: |
Paul M. Fay |
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Counsel for the Respondent: |
Rosemary Fincham |
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JUDGMENT
The appeal from the assessment made under the Excise Tax Act, notice of which is dated October 22, 2001, for the period July 1, 2000 to September 30, 2000, is allowed, without costs, and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled to input tax credits of $13,966.14, and no penalty is to be imposed.
Signed at Ottawa, Canada, this 4th day of April, 2003.
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"Campbell J. Miller" |
J.T.C.C.
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Citation: 2003TCC201 |
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Date: 20030404 |
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Docket: 2002-3335(GST)I
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BETWEEN:
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HEART DROP 2000 DISTRIBUTORS INC., |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Miller J.
[1] This is an appeal by way of the informal procedure by Heart Drop 2000 Distributors Inc. (Heart Drop), a company established by Mr. Don Wiskin. Heart Drop was in the business of purchasing heart drops and similar herbal products from Strauss Herb Co. (formerly Natural Way Herbs) and selling such products on to the public. Heart Drop was not charged goods and services tax (GST) on its purchase of products, nor did it in turn charge GST on the sale of the products, on its understanding that the products were zero-rated. The Minister of National Revenue (the Minister) assessed Heart Drop for the period July 1, 2000 to September 30, 2000 for a GST liability of $18,205.63 plus penalties and interest on the basis that the Appellant was liable for the GST on the sale of $278,000 of product during the period in question. The Minister calculated the amount owing using the formula 7/107 multiplied by $278,000. Heart Drop appeals the Minister's assessment on two fronts: firstly, the Minister's assessment fails to take into account the Appellant's entitlement to input tax credits (ITCs); and secondly, the penalties were inapplicable as the Appellant exercised due diligence in determining its GST liability.
[2] In June 1998, Mr. Wiskin, who was a contractor in the construction industry, suffered a near fatal heart attack. He was led to believe he would never work again. Then, he started taking Strauss' Heart Drops. He more fully recovered his health than he ever thought possible. Upon visiting Strauss Herb to thank the manufacturer for this remarkable recovery, he conceived the idea himself of selling this product. He determined that Strauss Herb had been in business since 1980. He felt comfortable with their reputation. He set up Heart Drop and shifted from buying the product solely for personal use, to buying the product as a distributor for resale.
[3] In buying the product personally, Mr. Wiskin had never paid GST. By May 2000, Heart Drop had set up a network of health food store customers. One of such contacts suggested that GST might apply to the product. This led Mr. Wiskin to have his wife, who was also involved in the business, contact the GST office of Canada Customs and Revenue Agency (CCRA) in Vancouver. As a result of that call, Heart Drop continued its approach of neither paying nor charging GST. The Wiskins believed the product was part of basic groceries, though they wanted some written confirmation of this position. They went to Stauss' bookkeeper, who on July 4, 2000, advised them in writing as follows:[1]
... Talked to the GST technicians and explained the products we sell and he said that the products are zero rated. That means that Peter cannot charge GST, it therefore means that we cannot charge GST when we sell it. ... There are 3 categories in the GST. Exempt - where you charge no GST because they are exempt. ...
Then there is zero rated. That means you do not charge GST on the product but are able to register and get a GST number so that you can apply for a refund of the GST you pay on your expenses. This is the category we all fall into that are distributors of these products.
The 3rd category is GST taxable - which we are not.
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I was sure of this as after all that is my expertise. I have been a tax preparer for 25 years and a consultant for 15 of those years. I did you and Peter the courtesy of verifying the information as you had raised a doubt in Peter's mind. Now hopefully you will lay this to rest and get on with the business at hand. ...
Around this time, July 2000, Strauss Herb terminated Heart Drop's distributorship. The evidence was unclear as to whether this was due to Heart Drop's questioning the GST matter, or because Mr. Wiskin would not endorse the product in a manner sought by Strauss. It was likely for both reasons, though the termination was short-lived as the differences were sorted out. Another distributor remained concerned about the GST issue and the Wiskins again contacted the GST authorities with CCRA in October 2000. Mrs. Wiskin indicated that in her call with Mr. Paraskae at CCRA, she fully described the product. While Mrs. Wiskin was unclear as to exactly how Mr. Paraskae described the classification of these types of product, she came away, once again, from the call satisfied their position was appropriate. Heart Drop confirmed in writing to CCRA their understanding following Mr. Paraskae's call. Shortly after, another distributor contacted the GST office in Calgary. There is no indication of the result of that inquiry.
[4] By January 2001, Heart Drop switched from the Strauss product to other products, on which they charged the GST. Mr. Wiskin acknowledges now that they were incorrect in their understanding of the status of the product for GST purposes.
[5] Heart Drop presented accurate records for the three months in issue, indicating purchases of $213,482.40 and sales of $278,286. No GST was included. Heart Drop made all payments by credit card. No GST number appears on Strauss Herb's invoices.
[6] The Appellant argues, firstly, that it exercised due diligence in attempting to determine its GST liability, and that, in relying on Pillar Oilfields Projects Ltd. v. Canada,[2] due diligence is a defence to this penalty provision. The due diligence was in contacting government authorities on at least two occasions, insisting on written confirmation from the suppliers and relying on what appeared to be the industry practice.
[7] In connection with the Appellant's position that it should be entitled to ITCs, the Appellant argues that to deny the credit is a denial of the very structure and object of the GST legislation. Just as Heart Drop is liable for GST deemed to have been paid by its customers, so too should Strauss be liable for GST deemed to have been paid by the Appellant, thus entitling the Appellant to the ITCs. The Appellant described itself and Strauss as businesses providing a taxable supply, both required to be registered and therefore registrants for purposes of the calculation of the ITCs.
[8] The Respondent maintains the Appellant did not do enough to justify a defence of due diligence on the imposition of the penalty. Relying on the manufacturer is not sufficient. Calls to the government, after the fact, is likewise inadequate. These steps should have been taken to clarify the issue before the business was underway.
[9] With respect to the claim for ITCs, the Respondent argues that the stringent requirements of subsection 169(4) of the Excise Tax Act have not been met. If the requirements are not met, no ITCs are available.
[10] I will deal with the question of the entitlement to ITCs first. Subsection 169(4) reads as follows:
169(4) A registrant may not claim an input tax credit 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 credit is in respect of property or a service supplied to the registrant in circumstances in which the registrant is required to report the tax payable in respect of the supply in a return filed with the Minister under this Part, the registrant has so reported the tax in a return filed under this Part.
[11] It is implicit in the provision that both the supplier and the recipient of product know that information is required, and that a return is to be filed for the appropriate determination of ITCs. By this, I do not mean parties ignorant of the law can rely on such ignorance in avoiding the law. Neither the Appellant nor Strauss, nor any other taxpayer, can escape liability by simply stating: "I did not know the law existed". Indeed, the Appellant is not saying that. The Appellant is saying that it knew the law existed but honestly believed that it did not apply to its situation. In reviewing a provision like this, under these circumstances, the question should not be centered on a debate as to whether the section is directory or mandatory, but should be on whether there was an honest mistake made. How can the law insist the taxpayer pursue a certain course of action which the taxpayer legitimately believed it was not required to pursue?
[12] The question then becomes a subjective - objective test. Subjectively, did Heart Drop honestly believe the products were zero-rated, and, objectively, was this a reasonable belief?
[13] Mr. Wiskin was a straightforward, forceful and most credible witness. His position at trial was that, while he still believes there might be some uncertainty as to the status of these products, he accepts CCRA's current position that the products are not basic groceries. At the relevant time his clear impression from the supplier, confirmed in writing, was that these products were zero-rated. He believed the supplier's bookkeeper. Of the hundreds of distributors, all but one likewise appear to have accepted this position. With only a small dissenting concern, Mr. Wiskin still investigated further with CCRA. His impression was that, while this was not a crystal clear area, he was doing nothing wrong in handling purchases and sales as he did. I believe Mr. Wiskin had an honest belief that Heart Drop was acting in accordance with the Excise Tax Act.
[14] Was that belief reasonable? The factors that support a finding that the belief was reasonable are:
(i) Mr. Wiskin never paid GST on the product when he bought it for personal use;
(ii) the supplier had a twenty-year history in the industry;
(iii) the supplier's bookkeeper professed to being knowledgeable in her understanding of GST, and was adamant verbally and in writing that the product was zero-rated;
(iv) prior to the period in question, CCRA confirmed verbally the Appellant's practice, after having the product described to it, according to the Wiskins; and
(v) the practice was widely accepted by distributors in the industry.
[15] The factors that support a finding that the belief was not reasonable are:
(i) the Appellant sought no independent professional advice;
(ii) at least one other distributor expressed a concern regarding the practice; and
(iii) in seeking CCRA's position, the Wiskins did not describe the product to CCRA as a herbal medicine.
[16] On balance, I find Mr. Wiskin's, and thus the Appellant's, honest belief that no GST was payable on the product was reasonable.
[17] Having made that determination, I turn back to the issue of whether, under such circumstances, Heart Drop is entitled to ITCs. Heart Drop is a registrant in accordance with the definition in the Excise Tax Act. CCRA has determined that, as a registrant selling product that is subject to the GST, Heart Drop should have charged and collected the seven per cent GST. So, CCRA's answer is to pretend that is exactly what Heart Drop did: of the $278,000 it collected, approximately $18,000 was GST, which Heart Drop then failed to remit. What CCRA has not done, however, was pretend that Heart Drop likewise paid GST on the $213,000 worth of product it acquired from the supplier. This yields an unfair result to Heart Drop. And I agree with the Appellant's counsel that it does fly in the face of the very clear intent of the GST mechanism. Heart Drop is the middleman. It is not the final consumer. It should not be taxed as such. If CCRA is going to pretend Heart Drop really did collect GST, because Heart Drop was acting under an honest mistake, then CCRA should also pretend that Heart Drop really did pay GST, based on the same honest mistake.
[18] This is an informal procedure, where I am quite prepared to go directly to the right result without getting tied up in the legal niceties of whether a provision is mandatory or directory. CCRA's position smacks too much of having its cake and eating it too, to be allowed to rely on the debatable mandatory nature of subsection 169(4). I believe, that by assessing as they have, CCRA is acknowledging that the payment of GST, in this situation, falls outside the normal rules of collection and remittance of GST. Consequently, so too can the determination of the ITCs. Where there is an honest mistake, which can be shown to be reasonable, which affords the taxpayer no opportunity to meet the so-called mandatory requirements, the taxpayer should not be hung out to dry by those requirements. The ITCs should be calculated on the same basis that the GST liability was calculated: 7/107 of the acquisition costs of $213,482.40 being a result of $13,966.14 should be deemed to have been paid by Heart Drop. Heart Drop is entitled to that amount as an ITC.
[19] I wish to be clear that this was not a matter of lack of documents or information rendering it impossible to determine the GST liability. The Appellant's records were clear and complete. It was a simple calculation to determine what was owed, once it was recognized the product was not zero-rated.
[20] Given my finding on the first issue, the amount of penalty would be significantly reduced. I go further though and reduce the penalty to zero, as I am satisfied that a due diligence defence is available to the Appellant. The Appellant took sufficient steps, as already outlined, to determine its liability. It should not be penalized. The appeal is allowed and the matter is referred back to the Minister on the basis that the Appellant is entitled to ITCs of $13,966.14 and that no penalty is to be imposed.
Signed at Ottawa, Canada, this 4th day of April, 2003.
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"Campbell J. Miller" |
J.T.C.C.
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CITATION: |
2003TCC201 |
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COURT FILE NO.: |
2002-3335(GST)I |
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STYLE OF CAUSE: |
Heart Drop 2000 Distributors Inc. and Her Majesty the Queen |
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PLACE OF HEARING: |
Kingston, Ontario |
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DATE OF HEARING: |
March 26, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Judge Campbell J. Miller |
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DATE OF JUDGMENT: |
April 4, 2003 |
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APPEARANCES: |
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Counsel for the Appellant: |
Paul M. Fay |
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Counsel for the Respondent: |
Rosemary Fincham |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
Paul M. Fay |
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Firm: |
Nelson, Lafrance & Tranmer, LLP |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |