On 17 December 2014, the Federal Court of Appeal (FCA) upheld the decision of the Tax Court of Canada (TCC), which allowed the taxpayer's appeal for input tax credits (ITCs) that had been disallowed by the Agence du revenu du Québec ( Revenu Québec) in respect of the goods and services tax (GST) paid to certain placement agencies that had not remitted the GST collected to the tax authorities.
In upholding the TCC decision, the FCA noted that the trial judge was right to conclude that Revenu Québec's position was unfounded given that Salaison Lévesque Inc. (SLI) had adduced sufficient evidence to demonstrate that the three placement agencies involved (Agencies) carried on commercial activities and had in fact rendered the services indicated on the invoices issued to SLI.
SLI is a family-owned business founded in 1967 that specializes in the commercialization of a wide range of ham products distributed both nationally and internationally. Given that its business entails intense peak periods followed by significant slowdowns, SLI is required to retain the services of different placement agencies to meet its immediate labour needs. This is why SLI required the Agencies' services from 2005 to 2009.
In accordance with the Excise Tax Act (ETA), SLI had an obligation to pay the GST indicated on the invoices for the services rendered by the Agencies, and the Agencies were in turn required to remit the tax collected to Revenu Québec. However, despite the fact that the Agencies were agents of Revenu Québec during the periods at issue for the purposes of collecting the GST, the Agencies never complied with their obligations.
The TCC decision
On 4 February 2014, the Honourable Justice Alain Tardif rendered his decision on the appeal brought by SLI regarding Revenu Québec's disallowance of the ITCs claimed for the GST that SLI had paid to the Agencies. In allowing the appeal, the TCC concluded that the arguments raised by Revenu Québec were inconsistent and that they were not based on the actual facts, but rather on the objective of recovering the GST not remitted by the Agencies. The TCC further stipulated that in the absence of specific legislative provisions, the tax authorities could not hold a company liable for the tax delinquencies of its suppliers.
More specifically, Revenu Québec argued that while services had indeed been rendered to SLI, they could not have been performed by the Agencies as they did not have the "capacities, expertise or material, financial and human resources to provide the workforce"1 required to perform the services requested. On that basis, Revenu Québec contended that the invoices were invoices of accommodation, in that they did not indicate the real name of the supplier having rendered the services. As such, Revenu Québec argued that the invoices issued did not meet the requirements of the ETA and its Regulations.2
For its part, SLI maintained that it had complied with the applicable regulations, that it had been diligent in its dealings with the Agencies and that the argument underlying the disputed assessment — that is, the absence of resources on the part of the Agencies — was ill founded.
As previously indicated, the TCC judge rejected Revenu Québec's arguments and agreed with SLI's contention that Revenu Québec had confused the concepts of lack of resources and that of unreported lack of resources. In the TCC case, the evidence adduced by SLI allowed the TCC to conclude not only that Revenu Québec's argument that the Agencies did not have the capacity to carry on a commercial activity was ill founded, but also that it was the Agencies who indeed had rendered the services to SLI.
Revenu Québec's argument that the name indicated on the invoices was incorrect was thus also rejected by the TCC judge. In the TCC's view, the fact that the supplies had been made by the Agencies or by unidentified subcontractors was not relevant to determining whether the ITCs should be allowed to SLI, as the Regulations permit that the name indicated on the invoices be that of the supplier of the services or its intermediary.
Lastly, the TCC concluded that SLI was entitled to claim the ITCs related to the GST remitted to the Agencies, as it had complied with the ETA and the Regulations. The TCC further noted that SLI had been sufficiently diligent in its relationships with the Agencies and that its situation differed from the recent decisions involving disallowed ITCs, in that the supplies had actually taken place, the Agencies' GST numbers were valid and that there was no collusion with the Agencies.
The FCA decision
Revenu Québec appealed the TCC decision to the FCA on the grounds that the TCC judge erred in reversing the burden of proof, as well as having made palpable and overriding errors in reviewing the evidence before him by taking into account elements extrinsic to the assessment. SLI cross-appealed on the basis that the TCC judge had erred in not granting costs beyond the tariff.
The FCA did not accept the arguments raised by Revenu Québec and rejected the appeal with costs, except for two amounts for which admissions were made and that had not been claimed before the TCC. However, the FCA allowed the cross-appeal and ordered that the case be returned to Justice Tardif so that he could reconsider the amount of costs to be granted to SLI.
In its judgment, the FCA pointed out that Revenu Québec did not dispute that the services had been rendered to SLI and that SLI had paid for said services; the only issue was to determine whether the TCC judge could have properly concluded that the Agencies whose name was indicated on the invoices had rendered the services to SLI, as required by the ETA and the Regulations, for the ITCs to be allowed.
In support of its position, Revenu Québec asserted that the TCC judge had erred requiring that it first establish that the Agencies had not rendered the services, which in Revenu Québec's opinion constituted an error of law, as the initial burden of proof should have fallen on SLI. The FCA rejected this argument, holding that the TCC judge: "[TRANSLATION] fully understood that Salaison was required to demolish the presumptions or assumptions formulated by the Minister by making a prima facie case and nothing more."3 Accordingly, it was only once that had been done that Revenu Québec was required to prove the merits of its position — that is, that the services had been rendered by unidentified third parties rather than by the Agencies, which it was unable to do.
The FCA was of the view that it was also required to reject Revenu Québec's second contention that the TCC judge had erred in his assessment of the evidence.
On that matter, Revenu Québec contended inter alia that the TCC judge had to draw a negative inference of the absence of certain witnesses — that is, the representatives of the Agencies. Given that the TCC judge had found SLI's witnesses credible, the FCA stated that the trial judge was in his rights to consider all of the evidence to decide whether or not to draw a negative inference.
The evidence adduced by SLI provided a basis not only for the TCC judge to conclude that the Agencies carried on commercial activities (the Agencies were duly incorporated, the representatives of the Agencies were contacted from time to time and they responded to SLI's requests by sending the number of persons required at the necessary times, etc.4), but also that they had rendered the services indicated on the invoices issued to SLI. In this respect, the FCA emphasized that it was not relevant to consider the manner in which the subcontractors paid, recruited or declared their employees for the purposes of determining whether they had actually rendered the services to SLI.
The FCA also made it clear that "[TRANSLATION] the weight to be given to the absence of payroll records or incomplete records depends on the context and on the other evidence adduced at trial."5 In the case at bar, such analysis was exclusively within the TCC judge's discretion.
The FCA was thus satisfied that the TCC judge did not err in concluding that Revenu Québec's position based on the contention that the Agencies did not carry on any commercial activity was unfounded and that SLI had discharged its burden of proof.
With regard to the cross-appeal, the FCA confirmed that the TCC judge had erred in concluding that the granting of costs above the tariff should be limited to abuses of process. Accordingly, the FCA ordered that the case be returned to Justice Tardif so that the parties could be heard on the matter of costs.
Analysis and comments
In the past few years, Revenu Québec has implemented significant controls to combat the phenomenon of "invoices of accommodation." In its attempts to counteract this problem, Revenu Québec has often adopted positions seeking to impose more responsibilities on taxpayers than is required under the current legislation and regulations. In Salaison Lévesque, it would appear that Revenu Québec sought to impose an additional burden on SLI by requiring it to ensure that the suppliers of goods or services it dealt with were not tax delinquents.
By rejecting Revenu Québec's appeal, the Honourable Justice Johanne Gauthier clarified the current state of the law by confirming that the SLI case was not a typical case of "invoices of accommodation" that Revenu Québec is striving to eradicate.
It is also interesting to note that Justice Gauthier made a distinction between the expressions "[TRANSLATION] false invoices" and "[TRANSLATION] invoices of accommodation." Without listing all possible scenarios, the FCA judge made it clear that the expression "[TRANSLATION] 'false invoices' had to be interpreted more broadly to include inter alia cases in which the purchaser of a supply is not involved in a scheme with the issuer of the invoice, but in which the information appearing on said invoice is said to be inaccurate." In its pleadings before the FCA, Revenu Québec had in fact dropped the argument that the invoices were "invoices of accommodation" and argued rather that the invoices were false.
The FCA judgment also reaffirms the well-established principle that in tax matters, whether or not a business is lawful or unlawful, legal or illegal, declared or undeclared has no bearing on how tax legislation is applied. It follows that the existence of a business is in no way dependent on whether its resources are declared in whole or in part to the tax authorities. Accordingly, a business should not be held liable for tax fraud committed by its supplier where Revenu Québec's sole grounds for disallowing ITCs consist of the absence of declared resources on the part of the supplier.
While this is an important decision for the legal community, as Revenu Québec sought to hold a business liable for the tax collected but not remitted by its suppliers, its future impact remains to be seen. Revenu Québec has 60 days from the date of the FCA decision to file for leave to appeal to the Supreme Court of Canada.
1 Salaison Lévesque Inc. v The Queen, 2014 TCC 36, para. 7.
2 Input Tax Credit Information (GST/HST) Regulations, SOR/91-45, s. 3 (Regulations).
3 The Queen v Salaison Lévesque Inc., 2014 FCA 296, para. 25.
4 Ibid. para. 36.
5 Ibid para. 37.
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