Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Tax, May 2009
On Thursday, April 23, 2009, the Supreme Court of Canada released a precedent-setting decision in United Parcel Service Canada Ltd. v. Her Majesty the Queen. The decision is the first appeal of a Goods and Services Tax (GST) assessment heard by Canada's highest court. The decision serves to broaden the number of eligible claimants beyond the person with the "legal liability" to pay GST in the case of claims for rebate in respect of GST paid in error.
The dispute arose in the context of UPS's customs brokerage activities in which UPS, between February 1, 1996 and December 31, 1997, overpaid some C$2.9-million in GST in error to the Minister of National Revenue on shipments imported into and delivered within Canada on behalf of various customers. These overpayments of GST were due to an array of circumstances including incorrect value for duty declarations, returned shipments, Canadian goods returning to the U.S., and the fact that some goods were duty-free. In such circumstances, UPS credited its customers' accounts for any overpayment (so that its customers only paid the correct amount of GST), and then deducted the overpayment from its own GST liability. This led to an assessment by the Minister of National Revenue in which UPS was disallowed the deduction of C$2,937,123 from its own liability. After a minor adjustment by the Minister, UPS still found itself out of pocket C$2,900,858 in respect of the GST payments made in error.
GST Rebate Available to Any Person Who Actually Pays In Error
Although the Minister made a factual concession that the amount in question constituted an "overpayment" of GST, the Agency took the position that UPS was not entitled to a refund on the basis that UPS was not the person who "paid" the amount on account of the GST pursuant to ss. 261(1) of the Act. In essence, the Canada Revenue Agency (the CRA) argued that UPS could not claim a refund of the GST because UPS was never liable to pay the GST, only its customers were. The Supreme Court of Canada disagreed with this proposition, stating that "it cannot have been the intention of Parliament that persons who were not liable for GST but paid GST in error could not obtain a rebate". Although the Minister relied on the precedent set in West Windsor Urgent Care Centre Inc. v. Canada as support for his argument that the only person entitled to a rebate is the person who was liable to pay the GST, the Supreme Court of Canada held that the case actually "stands for the proposition that the person who in fact paid and was out of pocket for the GST is the person that can claim a rebate under s. 261(1)." Based on the broad wording of the section, the Supreme Court of Canada further commented that "it would not be in accordance with the ordinary and grammatical meaning of the provision to read s. 261(1) in such a way as to preclude persons who have paid or overpaid GST in error from obtaining a rebate from the Minister."
Court Rejects Minister's Argument Concerning Possible Double Recovery of GST
One of the arguments made by the Minister against allowing UPS to claim the rebate for GST paid in error was the fact that the customers of UPS could have claimed a rebate or, if registrants, an input tax credit for the same amounts claimed by UPS. In rejecting this submission, the court noted that the "Minister is essentially arguing that a customer could fraudulently claim a rebate or input tax credit knowing that UPS had already made a claim for the same rebate." The court went on to hold that a person who acted in this way would be subject to criminal sanctions. Furthermore, the court stated that it does not "lie in the mouth of the Minister to raise such an argument ... where he has agreed that there has been an overpayment and where his position is that he is entitled to retain overpaid GST."
Import-Based Rebate Provisions Nota Barto Claim by UPS Under General Rebate Rules
The CRA also argued that UPS was not entitled to claim a rebate for GST paid in error because a rebate was "available" pursuant to one of two other specific rebate provisions dealing with overpaid GST on imported goods. The Supreme Court of Canada interpreted the relevant provisions of the Excise Tax Act as not precluding a rebate under the "general" rebate provision (ss. 261(1)) just because a rebate could have been claimed under one of two other provisions (ss. 215.1(1) or ss. 216(6)) of the Act. Instead, Rothstein J. stated that the intent of the Act was to avoid the double payment of rebates. As a result, since no rebate had been claimed by UPS or its customers under the more specific rebate provisions, it followed that UPS was not barred from making a claim under the general rebate provision.
The Supreme Court of Canada unanimously rejected the entirety of the CRA's arguments and came out strongly in favour of UPS, holding that UPS was entitled to the rebate of the C$2,900,858 it paid in error and that, pursuant to ss. 296(2.1), the Minister was obliged to apply the rebate against the net tax remittable assessed against UPS. This decision by the Supreme Court of Canada will, for UPS, bring closure to its hard-fought 10-year battle. For taxpayers generally, the decision should provide greater certainty and flexibility with respect to the persons who are entitled to make claims for GST paid in error.
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