Canada: Claiming Input Tax Credits On GST Paid To Delinquent Suppliers: A Review Of The Federal Court Of Appeal’s Decision In Salaison

INTRODUCTION

On December 17, 2014, the Federal Court of Appeal upheld a decision by the Tax Court of Canada which allowed a taxpayer's appeal for input tax credits ("ITCs") that had been previously denied by the Agence du revenu du Québec ("Revenu Québec"). The FCA's decision in Salaison Lévesque Inc. c. R.,1reaffirms that revenue authorities cannot impose more responsibilities on taxpayers than those required by the applicable legislation and regulations. The decision also has significant implications for taxpayers claiming ITCs for GST paid to placement agencies providing temporary labour services.

BACKGROUND FACTS

The taxpayer, Salaison Lévesque Inc. ("SLI"), is a family-owned business founded in 1967 specializing in the production of various ham products for sale in supermarkets across Canada. The business employed approximately 75 full-time employees, had annual sales between $15-$20 million, had never been the subject of a food recall, and was considered to be a credible organization whose reputation was beyond reproach.

Because the nature of SLI's business involved intense peak periods followed by significant slowdowns, SLI hired four placement agencies (the "Agencies") between 2005 and 2009 to provide temporary labour services during busy periods. As a GST registrant under Part IX of the Excise Tax Act2(the "ETA"), SLI was required to pay the GST for services rendered by the Agencies and the Agencies were required to remit the tax collected to Revenu Québec. SLI would subsequently claim an ITC on the GST paid to the Agencies pursuant to subsection 169(4) of the ETA. Prior to retaining the Agencies' services, SLI verified the accuracy of the Agencies' GST registration numbers with the REQ [Québec enterprise register].

Following a routine audit by Revenu Québec, it became apparent that the Agencies were involved in a fraudulent scheme whereby they pocketed the QST and GST paid to them by SLI instead of complying with their remittance obligations. Because the nature of the fraud prevented Revenu Québec from locating Agency employees or recovering unpaid remittances, SLI was audited by Revenu Québec and denied $12,443.34 of ITCs for GST paid to the Agencies.

Although the Agencies had provided personnel to SLI, Revenu Québec argued that SLI was not entitled to the ITCs because it did not ensure that the Agencies had the necessary facilities and resources to deliver the personnel they were providing. In other words, Revenu Québec took the position that no real service had been provided to SLI on the basis that the Agencies lacked the necessary "capacities, expertise or material, financial, and human resources" and were not paying their workers the legal minimum wage.3The Agencies' invoices were deemed to be "accommodation invoices", whereby an ITC would be claimed on services that had been billed but never actually performed. SLI appealed its assessment to the Tax Court of Canada and argued that it was diligent in its dealings with the Agencies and that Revenu Québec's absence of resources argument was unfounded.

THE TAX COURT OF CANADA DECISION

On February 4, 2014, the Tax Court of Canada (TCC) released a noteworthy decision and allowed SLI's appeal. According to Justice Alain Tardif, there was no evidence that SLI had participated in the Agencies' fraud. Justice Tardif was highly critical of Revenu Québec for erroneously equating unreported resources to a lack of resources and conducting "a minimal, superficial audit"4simply because "[Revenu Québec] could not recover the amounts owed by the Agencies".5This resultsdriven approach of attempting to hold SLI liable for their Agencies' remittances was fundamentally flawed and involved an incorrect interpretation of the ETA. Based on the Court's finding that the Agencies had provided SLI with supplies, Revenu Québec's conclusion that the Agencies lacked the capacity to carry on commercial activity was ill-founded.

Although the Agencies were nothing more than "...highlevel tax delinquents",6Justice Tardif found that SLI was not responsible for policing its suppliers to ensure that they complied with their GST remittance requirements. Because SLI had complied with the ETA and the Regulations, Justice Tardif concluded that it was entitled to claim the ITCs:

[121] For all these reasons, I conclude that the Appellant has shown that it provided ArQ [Revenu Québec] with all the information required by the ETA and the Regulation to become entitled to the litigious ITCs; it cannot lose those ITCs solely because it dealt with staffing Agencies that turned out to be tax delinquents. The appeal is therefore allowed and the assessment cancelled.7

THE FEDERAL COURT OF APPEAL DECISION

Revenu Québec appealed to the Federal Court of Appeal (FCA) on the following grounds: (i) that the TCC erred in reversing the burden of proof; (ii) that the TCC incorrectly concluded that SLI had demolished, on a prima facie basis, Revenu Québec's assumptions underlying the assessment; and (iii) that the TCC made palpable and overriding errors in interpreting the evidence. There was also a cross-appeal by SLI on the basis that Justice Tardif erred in not granting costs beyond the Tariff amount.

The FCA rejected Revenu Québec's appeal with costs, with the exception of two amounts that had been discussed but not been claimed before the TCC. In considering Revenu Québec's first and second arguments, the Court pointed out that Revenu Québec did not dispute the fact that SLI had paid for services that were rendered. Therefore, the real issue to be determined was whether the TCC was correct in allowing the ITCs for the services provided by the Agencies. The FCA rejected Revenu Québec's position that the initial burden of proof should have fallen on SLI and instead pointed out that the TCC "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" [translation].8Only after this had been done was Revenu Québec required to prove the merits of its claim, which it was unable to do.

The FCA also rejected Revenu Québec's third argument that the TCC erred in interpreting the evidence. Justice Tardif was entitled to consider all of the evidence in deciding whether to draw a negative inference from the fact that there were no representative witnesses from the Agencies as a result of the fraud. By considering all of the available evidence, the TCC was justified in concluding that the Agencies were carrying on commercial activities and that they had rendered the services to SLI. It was also within Justice Tardif's discretion to determine that the manner in which the Agencies paid, recruited, and declared their employees was irrelevant in determining whether they had actually provided services to SLI. According to the FCA, "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" [translation].9

The FCA also commented on how Revenu Québec had amended its position on appeal to argue that the "accommodation invoices" were in fact "false invoices". Here, Justice Gauthier distinguished "false invoices" from "accommodation invoices" and held that "'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 invoices, but in which the information appearing on the invoice in question is said to be inaccurate" [translation].10

As a result, the FCA concluded that the TCC did not err in concluding that Revenu Québec's position was unfounded and that SLI had discharged its burden of proof. On the issue of the cross-appeal, the FCA ordered the case back to Justice Tardif for a determination of the quantum of costs issue.

IMPLICATIONS

The FCA's decision in Salaison sends a strong message to the legal community that revenue authorities, such as Revenu Québec, cannot hold a taxpayer liable for the tax collected but not remitted by suppliers. The future impact of Salaison remains to be seen, however, since the Crown has until February 16, 2015 to seek leave to appeal to the Supreme Court of Canada.

Jamie G. Walker is a Student-at-law at Miller Thomson LLP (2015).

Footnotes

1 Salaison Lévesque Inc. c. R., 2014 CAF 296.

2 Excise Tax Act, R.S.C. 1985, c. E-15.

3 Salaison Lévesque Inc. c. R., 2014 TCC 36, at para. 7.

4 Ibid., at para. 34.

5 Ibid., at para. 37.

6 Ibid., at para. 60.

7 Ibid., at para. 121.

8 Supra note 1, at para. 25.

9 Ibid., at para. 37.

10 Ibid., at para. 14.

Originally published by Taxes & Wealth Management, March 2015 | Issue 8-1.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions