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Gordon: CRA May Not Fetter Discretion on Interest Relief Application

In Gordon v Canada (Attorney General) (2016 FC 643), the Federal Court granted the taxpayer’s application for judicial review and reminded the CRA that it may not fetter its discretion when considering applications for interest relief.

The taxpayer, an individual, bought and imported vehicles using the dealer license of Coastal Collision, a local auto dealership. Both parties consulted their respective accountants, who advised the parties that Coastal Collision should collect and remit GST/HST on the auto sales.

Accordingly, in reporting periods from January 1, 2008 to June 30, 2010, Coastal Collision collected and remitted the GST/HST on all the vehicles sold in its arrangement with the taxpayer.

The CRA reassessed the taxpayer and Coastal Collision on the basis that the taxpayer was required to collect and remit GST/HST on the auto sales. The CRA reduced the GST/HST owed by Coastal Collision, and increased the taxpayer’s GST/HST owing to $46,650.84.

On October 27, 2011, the CRA refunded Coastal Collision’s overpayment, at which time the taxpayer paid a portion of his GST/HST owing, and paid the remaining amount on October 31, 2011.

The CRA assessed interest on the GST/HST assessed against the taxpayer.

The taxpayer made an application for interest relief in which he asked for cancellation of all interest accrued since 2008 except for the modest interest accrued from October 27 to 31, 2011, the period after the CRA refunded Coastal Collision and before the taxpayer had paid the full amount owing.

Under subsection 281.1(1) of the Excise Tax Act (see also subsection 220(3.1) of the Income Tax Act), the CRA may waive or cancel interest and penalties that have been assessed against a taxpayer. The CRA has published guidelines that describe the circumstances in which the CRA may grant relief (i.e., natural disasters, illness, emotional/mental distress, CRA delay, inability to pay/financial hardship, etc.) and certain factors to be considered on each application (i.e., taxpayer’s history of compliance, existence of unpaid balance, actions taken to remedy the omission, existence of reasonable care/diligence by taxpayer, etc.) (see the CRA’s guidelines here and here).

In Gordon, the CRA had denied the taxpayer’s request for interest relief on the basis that a “wash transaction” existed in this case (i.e., the GST/HST was collected and remitted by the wrong entity within a closely related group of commercial entities or associated persons), and the provisions of GST/HST Memorandum 16.3.1 “Reduction of Penalty and Interest in Wash Transaction Situations” allowed the waiver/cancellation of only that interest in excess of 4 percent.

On the application for judicial review in the Federal Court, the taxpayer argued that it was unfair to charge interest on payments that were at all times in the possession of the CRA, and the CRA had erred in refusing to grant relief. The Crown argued that the CRA had made no reviewable error in the decision, and moreover the decision was reasonable.

The Federal Court noted that fettering of discretion is always outside the range of acceptable outcomes and if therefore per se unreasonable (Stemijon Investments Ltd. v. Canada (Attorney General), 2011 FCA 299; JP Morgan Asset Management (Canada) Inc. v. M.N.R., 2013 FCA 250). A decision-maker may consider administrative guidelines, but a decision-maker will fetter his/her discretion if they consider the guidelines as binding (Waycobah First Nation v Canada (Attorney General) 2011 FCA 191).

In this case, the Federal Court noted the CRA had treated Memorandum 16.3.1 as binding, and as such the Minister had fettered her discretion. The CRA had failed to give any consideration to the taxpayer’s individual circumstances, including his history of compliance, the fact that GST/HST had been remitted promptly, and the error was not the result of any negligence on the taxpayer’s part (in fact, he had relied on professional advice).

The Federal Court granted the taxpayer’s application for judicial review, set aside the CRA’s decision, and returned the matter to the CRA for redetermination in accordance with the Court’s reasons.

The Gordon case is another reminder from the courts that the CRA’s administrative guidelines, while providing “consistency, transparency and fairness in the decision-making process”, are advisory only and the CRA may not rely on such guidelines in a manner that limits the discretion conferred under the statute.

Taxpayers who encounter such a response from the CRA on an application for interest relief may wish to remind the CRA of this important principle, as it has been the subject of several cases in recent years, and the courts have been clear about the role of such guidelines in the decision-making process.

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Gordon: CRA May Not Fetter Discretion on Interest Relief Application

B.C. Supreme Court Rescinds Land Transfers

In Re 0741508 BC Ltd and 0768723 BC Ltd  (2014 BCSC 1791), the British Columbia Supreme Court (“BCSC”) considered whether rescission should be granted in respect of two real estate transactions in which the applicant corporations had transferred several parcels of land to a partnership.

The transactions were undertaken as part of a proposed commercial development of the land. The parties intended – in accordance with industry practice – that there would be no net GST/HST payable on the land transfers (i.e., the GST/HST payable would be offset by an input tax credit).

However, the partnership was not registered for GST/HST purposes under the Excise Tax Act (“ETA”) and accordingly the input tax credit was not available. The CRA audited members of the corporate group and reassessed nearly $6 million in GST/HST and penalties.

The parties brought an application to the BCSC for rescission of the transfers (i.e., to effectively put the property back in the hands of the selling corporations).

The application was opposed only by the CRA, which argued that rescission should not be available as the mistake in question was not related to the purpose of the transaction but only its consequences. In Gibbon v Mitchell ([1990] 1 W.L.R. 1304 (Ch.), a U.K. court held that rescission would be granted for a mistake where “the mistake is as to the effect of the transaction itself and not merely as to its consequences or the advantages to be gained by entering into it”. Similar reasoning was followed by the Ontario court in 771225 Ontario Inc. v Bramco Holdings Co Ltd. ([1994] 17 O.R. (3d) 571 (Gen. Div.)), which held that an assessed land transfer tax “was a consequence of the transaction, rather than its purpose, and therefore the case did not fall within the strict confines of the rule for granting relief.”

In considering whether to exercise its discretion to order equitable rescission, the BCSC cited McMaster University v Wilchar Construction Ltd. ([1971] 3 O.R. 801 (H.C.)):

In equity, to admit of correction, mistake need not relate to the essential substance of the contract, and provided that there is mistake as to the promise or as to some material term of the contract, if the Court finds that there has been honest, even though inadvertent, mistake, it will afford relief in any case where it considers that it would be unfair, unjust or unconscionable not to correct it.

In the present case, the BCSC noted that, in Re: Pallen Trust (2014 BCSC 305) the court had rejected Gibbon and instead relied on the test adopted in the U.K. Supreme Court decision in Pitt v Commissioners for Her Majesty’s Revenue and Customs ([2013] UKSC 26) to determine whether to rescind a voluntary transaction.

Equitable rescission, under Pallen, would be available where there was a “causative mistake of sufficient gravity” as to the “legal character or nature of the transaction, or as to some matter of fact or law which is basic to the transaction” such that it would be unconscionable, unjust or unfair not to correct the mistake.

The BCSC noted that, in the transactions at hand, the intention of the parties had always been that the partnership would be registered under the ETA so that no net GST/HST would be payable. This was distinguishable from Bramco, where there had never been a specific intention to minimize the applicable tax.

The BCSC reiterated the principle set out in McMaster and Pallen that “if there has been an honest, even though inadvertent mistake, equity will afford relief in any case that the court considers that it would be unfair, unjust, or unconscionable not to correct it” and held that it would be unfair and unjust for either Canada and/or the Province to gain over $6 million plus accruing interest solely because of a mistake in not registering under the ETA.

The BCSC granted the rescission and held that there was “no adequate legal remedy available, the petitioners are not seeking to carry out retroactive tax planning, and there is no prejudice to third parties.”

The Court did not explicitly consider whether the mistake met the threshold of being of sufficient gravity as to the legal character, nature of the transaction, or as to some matter of fact or law which is basic to the transaction.  Presumably, the punitive and negative results of the transaction were sufficiently grave – that is, the mistake about the fact as to whether ETA registration had been completed was sufficiently grave – that the Court found rescission should be granted.

Pallen has been appealed to the B.C. Court of Appeal.  It will be interesting to see if the present case is appealed as well.  Either way, the equitable doctrine of rescission continues to develop in the context of unintended tax consequences.

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B.C. Supreme Court Rescinds Land Transfers

Health Quest: Appeal allowed where Crown failed to properly plead assumptions

What is the result of the Crown’s failure to properly plead its assumptions in the Reply? This issue was considered by the Tax Court in Health Quest Inc. v. The Queen (2014 TCC 211) in which the Crown’s Reply included “assumptions” that were statements of mixed fact and law rather than facts alone.

The taxpayer was a distributor of modified and “off-the-shelf” therapeutic footwear for relief of various disabling conditions of the feet. During the reporting periods at issue, section 24.1 in Part II of Schedule VI of the Excise Tax Act stated that zero-rated supplies included footwear designed for use by an individual who has a crippled or deformed foot or other similar disability when the footwear is supplied on the written order of a medical practitioner. (The provision was amended in 2012 to broaden the definition to include written orders by a “specified professional”.) The taxpayer considered that most or all of the footwear it sold was zero-rated under s. 24.1.

The CRA audited the taxpayer for the period of January 1, 2008 to December 31, 2009. Based on a sampling of the taxpayer’s sales (in the months of August and December 2009), the CRA assessed additional GST owing of $42,274.72 for the period.

In the Tax Court, the taxpayer argued that all of the shoes it sold were for a prescribed diagnosis and thus zero-rated. The Respondent argued that the “off-the-shelf” shoes sold by the taxpayer (i.e., sold “as-is” without modification) were not zero-rated and thus subject to GST.

Under section 6 of the Tax Court of Canada Rules of Procedure Respecting the Excise Tax Act (Informal Procedure), every Reply to a Notice of Appeal must contain (among other things) a statement of the findings or assumptions of fact made by the CRA when making the assessment and the reasons the Crown intends to rely on in support of the assessment. (The Tax Court’s other procedural rules contain substantially identical provisions – see, for example, section 49 of the Tax Court of Canada Rules (General Procedure)).

In Health Quest, the Crown’s Reply stated, “In so assessing the Appellant, the Minister relied on the following …

(a)        the facts stated and admitted above;

(b)        the Appellant was a GST/HST registrant;

(c)        the Appellant was required by the Excise Tax Act, R.S.C. 1985, c. E-15, as amended (the “Act”) to file its GST/HST returns on a quarterly basis;

(d)       the Appellant was a corporation involved in the supply of footwear which were specially modified by the Appellant or were specially designed by the manufacturer for persons with physical disabilities;

(e)        the products described in subparagraph 7(d) above are zero-rated for HST pursuant to Schedule VI of the Act;

(f)        the Appellant also supplied other products which were not zero-rated pursuant to Schedule VI of the Act; and

(g)        during the periods under appeal, the Appellant failed to collect tax of not less than $42,274.72 on its supply of products which were not zero-rated pursuant to Schedule VI of the Act.”

The Tax Court noted that paragraphs (f) and (g) were problematic in that they both contained statements of mixed fact and law, which the Federal Court of Appeal has stated have no place in the Minister’s assumptions (see Anchor Pointe Energy Ltd. v. the Queen (2003 FCA 294) and Canadian Imperial Bank of Commerce v. The Queen (2013 FCA 122)). In Anchor Pointe, the Court of Appeal stated,

[23] The pleading of assumptions gives the Crown the powerful tool of shifting the onus to the taxpayer to demolish the Minister’s assumptions. The facts pleaded as assumptions must be precise and accurate so that the taxpayer knows exactly the case it has to meet.

In Health Quest, the Tax Court determined the Crown’s key “assumptions” were merely the Respondent’s view on the application of the law to the facts of the appeal.

The Court noted that where the Crown has not set out any proper assumptions of fact in the pleadings, the evidentiary onus reverts to the Crown to establish the correctness of the assessment (see Pollock v. Minister of National Revenue (94 DTC 6050 (Fed. C.A.) and Brewster v. the Queen (2012 TCC 187)). In other words, the normal requirement that a taxpayer must adduce evidence to “demolish” the Crown’s assumptions is reversed and the Crown must prove its case.

In Health Quest, the Respondent’s only evidence was the testimony of the appeals officer. The Tax Court held the testimony did not establish, on a balance of probabilities, that the footwear in question was not zero-rated. The Court noted that it would have been beneficial to have product literature, scientific studies, or the testimony of medical professionals, and this type of evidence would have been essential to engage in a meaningful textual, contextual and purposive analysis of the applicable legislation (there are no previous cases that have considered the interpretation of section 24.1).

The Tax Court allowed the appeal.

The Court’s decision in Health Quest is a helpful reminder of the importance of including only facts and not legal arguments in the assumptions in a Reply. Taxpayers and their counsel should closely scrutinize the assumptions and reasons described in a Reply to ensure the pleading conforms with the Tax Court’s rules.

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Health Quest: Appeal allowed where Crown failed to properly plead assumptions

Tax Court Interprets “Ownership” For Purposes Of GST/HST New Housing Rebate

In Rochefort v. The Queen (2014 TCC 34), the Tax Court of Canada provided clarity on the definition of “ownership” for the purposes of the GST/HST New Housing Rebate. Justice Campbell Miller held that “ownership” in subparagraph 254(2)(e) of the Excise Tax Act (the “ETA”) does not necessarily mean holding legal title but denotes a more expansive view of ownership.

In the case, the recently-married Mr. and Mrs. Rochefort decided to buy a new home. Unfortunately, shortly before the closing, Mr. Rochefort was advised by his bank that, due to his failure to sell his current property and his wife’s poor credit rating, the couple no longer qualified for a mortgage. Having already paid $20,000 in deposits, the couple chose to close the deal, and so they enlisted Mr. Fontaine, the nephew of Mr. Rochefort, to act as a co-signor on a mortgage from another bank.

Mr. Fontaine testified that he was prepared to help his uncle by signing whatever documents were required. Mr. Fontaine in fact signed a Fixed Rate Mortgage form, as well as a Direction re: Title, authorizing the lawyers to transfer the deed to Mr. Rochefort and Mr. Fontaine as joint tenants.  It was evident from Mr. Fontaine’s testimony that he was not entirely clear as to what he had signed, and he had no intention of ever living in, or receiving a benefit from, the property. Rather, it was clear that the new home was for the sole benefit of Mr. and Mrs. Rochefort, and Mr. Fontaine was merely assisting a family member by doing a favour.

Mr. Rochefort signed the new housing rebate in 2010 and, as a result, the developer was credited with $27,278. The Minister of National Revenue reassessed Mr. Rochefort on the basis that he was not entitled to the rebate as the definition of “ownership” in subparagraph 254(2)(e) of the ETA had not been satisfied.

The Minister argued that, under subparagraph 254(2)(e), “ownership” must be transferred to a “particular individual” (the Court noted that, where there is more than one purchaser, subsection 262(3) of the ETA makes it clear that “particular individual” refers to both purchasers). Ownership had not been transferred to Mr. and Mrs. Rochefort but had been transferred to Mr. Rochefort and Mr. Fontaine. Therefore, in the Minister’s view, this requirement had not been met.

The Tax Court disagreed. Mr. and Mrs. Rochefort were the “particular individuals” who signed the Agreement of Purchase and Sale and, thus, Mr. Fontaine was not a “particular individual” for the purposes of the ETA. The requirements in subsection 254(2) of the ETA had been met by Mr. Rochefort. The only question was whether the other “particular individual” (i.e., Mrs. Rochefort)  had ownership transferred to her as required by subparagraph 254(2)(e).

The Minister argued that “ownership” meant title to the property, and suggested that definition of owner in the Ontario Land Titles Act (i.e., an owner in fee simple) should apply for the purposes of the ETA. However, the Tax Court noted that, if the drafters of the ETA had intended ownership to mean title, they could have said as much in the ETA. The Tax Court held that “ownership” for purposes of the GST/HST New Housing Rebate must be explored in a “textual, contextual and purposive manner for a fuller meaning than simply title.”

The Court interpreted subparagraph 254(2)(e) as a timing condition – ownership happens after substantial completion. This view is consistent with the views expressed by the CRA in GST/HST Memorandum 19.3.1 “Rebate for Builder-Built Unit (Land Purchased)” (July 1998, as amended in 2002 and 2005).

The Tax Court viewed Mr. and Mrs. Rochefort as the individuals the rebate was intended to benefit. They were the buyers of the property, the individuals liable for the GST, and they took possession of the property after its substantial completion in order to reside in it as their primary residence. Moreover, Mrs. Rochefort had acquired sufficient rights to constitute ownership thereby satisfying the requirements in 254(2)(e): she had signed the Agreement of Purchase and Sale to become an owner, she had made the necessary deposits, she acted as an owner in making decisions to amend the Agreement of Purchase and Sale, she was liable for the GST, she took possession of the property with her husband, and had acted in every way as an owner by enjoying the property.

The Tax Court concluded that Mrs. Rochefort was a beneficial owner of the property and that Mr. Fontaine had agreed to hold title solely for the benefit of the Rocheforts. As a trustee, Mr. Fontaine was required to convey title to the Rocheforts on demand or to any third party at their request. “Ownership” of the property had been transferred to Mrs. Rochefort.

Accordingly, the taxpayer’s appeal was allowed and Mr. Rochefort was entitled to the GST/HST New Housing Rebate under subsection 254(2) of the ETA.

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Tax Court Interprets “Ownership” For Purposes Of GST/HST New Housing Rebate

The importance of a notice of objection: Salisbury v. The Queen

In Salisbury House of Canada Ltd. et al. v. The Queen (2013 TCC 236), the Tax Court of Canada reiterated the importance of the statutory preconditions that must be met before a taxpayer may appeal to the Court. These statutory requirements should be kept in mind by taxpayers who wish to ensure their disputes are heard on the substantive merits rather than dismissed for procedural reasons before they have an opportunity to argue their case.

In Salisbury, the corporate taxpayer operated several restaurants in the Winnipeg area. The company was assessed additional GST for the period February to June, 2006 but did not object to those assessments. Around the same time, a new board of directors was elected. Due to financial difficulties, the company made a proposal under the Bankruptcy and Insolvency Act and attempted to negotiate an agreement with the CRA pertaining to the GST arrears. The parties eventually agreed that a portion of the GST liability would be paid. Importantly, at this point, no directors’ liability assessments had been issued under s. 323 of the Excise Tax Act. Payment was remitted, but the directors sought to have their potential liability for tax determined “by a court of competent jurisdiction”.

The company and the individual directors each filed a Notice of Appeal in the Tax Court. In response, the Crown brought a motion to dismiss the appeals pursuant to paragraph 53(b) of the Tax Court of Canada Rules (General Procedure) on the grounds that (inter alia) the appeals were scandalous, frivolous or vexatious.

Under section 306 of the Excise Tax Act, a taxpayer must file a notice of objection before a Notice of Appeal may be filed in the Tax Court. In Salisbury, the GST assessments against the corporate taxpayer had not been challenged by way of objection and there had been no assessments issued against the directors.  The Minister argued that the appellants had no statutory right of appeal because the requirements of section 306 had not been met.

The Tax Court granted the Minister’s motion and dismissed the appeals. Since no notices of objection had been filed by the company, this precluded an appeal from the original GST assessments. In respect of the appeals by the individual directors, the Court held that they too could not succeed – no assessments had been issued, and no notices of objection filed.

The Salisbury decision is consistent with a long line of jurisprudence reflecting the requirement that taxpayers must satisfy the statutory preconditions before appealing to the Tax Court. In Roitman v. The Queen (2006 FCA 266), the Federal Court of Appeal stated that a court “does not acquire jurisdiction in matters of income tax assessments simply because a taxpayer has failed in due course to avail himself of the tools given to him by the Income Tax Act.” More recently, in Goguen v. The Queen (2007 DTC 5171), the Tax Court reiterated that, as “a matter of law, the failure of the [taxpayer] to serve a notice of objection on the Minister deprive[s] the Tax Court of Canada of the jurisdiction to entertain an appeal in relation to the assessment” (see also Whitford v. The Queen (2008 TCC 359), Bormann v. The Queen (2006 FCA 83), and Fidelity Global Opportunities Fund v. The Queen (2010 TCC 108)).

Salisbury reminds corporate and individual taxpayers of the need to obtain proper advice from tax professionals with respect to their rights and obligations under the Excise Tax Act and the Income Tax Act. This is all the more important in cases where the corporation is experiencing financial difficulty and/or contemplating protection under the Bankruptcy and Insolvency Act (i.e., as the CRA may be a primary creditor). In Salisbury, the directors may not have been personally liable for corporate taxpayer’s GST liability. However, because of the manner and timing of the payment of GST arrears, their “appeal” to the Tax Court was defeated on procedural rather than substantive grounds and they were, unfortunately, precluded from presenting their case.

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The importance of a notice of objection: Salisbury v. The Queen

Imposition of GST on Criminal Defence Legal Fees Does Not Infringe Section 10(b) of the Charter: Stanley J. Tessmer Law Corporation v The Queen

In Stanley J. Tessmer Law Corporation v The Queen, 2013 TCC 27, Justice Paris of the Tax Court of Canada confirmed that the general GST charging provision in section 165 of the Excise Tax Act, R.S.C. 1985, c. E-15 (the “ETA”) does not infringe section 10(b) of the Canadian Charter of Rights and Freedoms (the “Charter”).  Section 10(b) of the Charter provides:

Everyone has the right on arrest or detention

to retain and instruct counsel without delay and to be informed of that right;

The Appellant (“Tessmer”) provides criminal defence legal services.  During the period July 1, 1999 to December 31, 2006, Tessmer did not collect GST (totaling $228,440.97) in respect of legal services for criminal defence work charged to clients who had been arrested or detained and who were either charged with a criminal offence or who had been arrested with criminal charges pending.

Tessmer did not conduct an independent review of the financial circumstances of its clients to determine the ability of its individual clients to afford its fees and any GST exigible on those fees.  In addition, no financial records of any of Tessmer’s individual clients were produced at the hearing.

The Minister of National Revenue (the “Minister”) assessed Tessmer for such GST plus interest and penalty, and Tessmer appealed those assessments to the Tax Court.  In the context of those appeals, the parties decided to bring a reference to the Tax Court, pursuant to section 310 of the ETA, to determine the following question raised by Tessmer in its appeals:

Whether, based on the facts set out in the Agreed Statement of Facts filed herewith, the goods and services tax (GST) imposed by s. 165 of the Excise Tax Act infringes or is inconsistent with the rights of the Appellant’s clients guaranteed by ss. 7 and ss. 10(b) of the Charter of Rights and Freedoms such that s. 165 of the Excise Tax Act is, to the extent of any such inconsistency and, subject to s.1 of the Charter, of no force and effect by reason of s. 52(1) of the Constitution Act.

Although the question put to the Tax Court referred to both sections 7 and 10(b) of the Charter, Tessmer’s counsel advised the Tax Court at the hearing that he was only relying on section 10(b) of the Charter, and the above question was amended accordingly.

Subsection 165(1) of the ETA, the general GST charging provision, read as follows during the periods at issue:

Subject to this Part, every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 7% [note: 6% for the period between July 1, 2006 through December 31, 2006 – Ed.] on the value of the consideration for the supply.

Tessmer argued that a tax on criminal defence legal services provided to a person who has been arrested or detained is inconsistent with that person’s right under section 10(b) of the Charter to retain or instruct counsel of choice, on the basis that the tax is an impediment to the exercise of that right and is therefore unconstitutional with respect to both purpose and effect.  Relying on a U.S. case (United States v. Stein, SI 05 Crim. 0888 LAK United States District Court, Southern District of New York June 26, 2006), Tessmer argued that a tax on criminal defence legal fees will interfere with the right to counsel since the additional cost of the tax to an accused will interfere with the financial resources available to mount a defence to the charges brought against him or her.

Tessmer also argued that it was not required to provide evidence that any of its clients were denied counsel of their choice as a result of the tax imposed on the services of counsel.  Instead, and relying on a series of past Charter cases, Tessmer argued that it only needed to show that the general effect of the tax is unconstitutional under reasonably hypothetical circumstances.

The Tax Court, therefore, was required to determine whether either of the purpose or the effect of subsection 165(1) of the ETA was contrary to section 10(b) of the Charter.

With respect to the purpose of subsection 165(1) of the ETA, the Tax Court readily found that the purpose of that provision was not unconstitutional:

[31]        The appellant contends that the general purpose of the GST legislation imposing the tax is to raise revenue but that it also has a specific purpose to tax an accused with respect to the provision of legal services in defence of a State-sponsored prosecution. Its only submission regarding the unconstitutionality of the purpose of the tax was that it is patently inconsistent to prosecute a person and at the same time tax the legal services that the person requires in order to defend against the prosecution.

[32]        I am unable to ascribe the specific purpose suggested by the appellant to subsection 165(1) of the ETA, ….

[33]        Subsection 165(1) is a provision of general application and covers an infinite variety of transactions. I do not believe that it can be said that a specific purpose of subsection 165(1) is to tax legal services in defence of a State-sponsored prosecution since Parliament has not singled out those particular services for different treatment under that provision. Therefore I find that the appellant has not shown that subsection 165(1) of the ETA has an invalid purpose.

With respect to the effect of subsection 165(1) of the ETA, the Tax Court rejected Tessmer’s arguments that no evidence of an impediment to section 10(b) Charter rights was required.  The Tax Court stated, in relevant part, as follows:

[54]        From my review of the Supreme Court decisions on point, it appears that a party may only rely on hypotheticals to establish a factual foundation for a Charter challenge where actual facts are not available to that party. In such cases, the Court has been willing to consider imaginable circumstances which could easily arise in day-to-day life. ….

[55]        A party will also be relieved from presenting any factual foundation at all in cases where the unconstitutionality of the impugned legislation is apparent on the face of the legislation.

[56]        Apart from these limited exceptions, a party challenging legislation will be required to bring evidence of the effects of the legislation. Therefore, I reject the appellant’s contention that in any Charter challenge the Court may rely on imaginable circumstances to establish the effects of impugned legislation.

[57]        Furthermore, since the appellant does not take the position that evidence of the effect of the GST on the ability of its clients who were detained or arrested to afford its services is unavailable, I find that this case does not fall within the exception set out in Mills and implicitly recognized in Seaboyer/Gayme.

[58]        It is also obvious that the section 12 Charter standard of review which was applied in Goltz and Ferguson is not relevant to this case.

[64]        In response to the appellant’s submission that prejudice to a person’s section 10(b) rights must be presumed in this case, I can only say that I am unable to easily imagine that a person who has been arrested or detained would be prevented or even deterred from retaining and instructing counsel in that situation by the additional GST payable on counsel fees.

[65]        Finally, I do not accept the appellant’s contention that the constitutionality of the GST on criminal legal defence services is a question of law alone and therefore that it is not required to produce any evidence because it is apparent on its face that the tax will impede access to counsel.

Therefore, in the absence of evidence that any of Tessmer’s clients were unable to retain counsel as a result of the GST payable on legal services, the Tax Court found that the GST imposed under section 165 of the ETA does not infringe section 10(b) of the Charter.

Interestingly, the Tax Court hearing took place on December 15, 2011, and the decision was released on January 28, 2013.  Tessmer is still within the time limit to file an appeal with the Federal Court of Appeal, so it remains to be determined whether the Tax Court’s judgment remains the final word on this issue.

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Imposition of GST on Criminal Defence Legal Fees Does Not Infringe Section 10(b) of the Charter: Stanley J. Tessmer Law Corporation v The Queen

“Secondary” but not “incidental”: FCA provides guidance on s.138 of the Excise Tax Act in 9056-2059 Quebec Inc. v. The Queen

In 9056-2059 Quebec Inc. v. The Queen (“9056-2059”), the Federal Court of Appeal (Nadon, Trudel and Mainville, JJ.A.) allowed the taxpayer’s appeal from a decision of the Tax Court of Canada. In the process, the FCA provided valuable guidance on the interpretation of section 138 of the Excise Tax Act (the “Act”), which deals with the provision of multiple supplies for a single price.

The registrant in 9056-2059 operated an agri-tourism business interested in beekeeping.  To promote sales of its cottage-industry products (such as honey), the registrant developed a network of nature trails on its land.  To gain access to the trails, users were obliged to purchase a farm product.  The transaction was carried out through the purchase of tickets.  The first ticket was sold at $12 for an adult and $10 for a child.  In practice, an adult who paid $12 obtained a first farm product, priced at one ticket, and needed do nothing more to be able to use the trails that day for as many hours as desired.  According to the pricing sheet, one ticket could have been used to obtain one of the following products: 50 g of honey or maple syrup, a bag of 8 candies, a maple lollipop or a 454-g bag of buckwheat flour.  By comparison, a 500-g jar of churned liquid honey is priced at 4 tickets, whereas the 1-kg jar is priced at 6 tickets.  Exceptions aside, additional tickets cost $1.50 each.

If supplied separately, the supply of farm products would have been zero-rated (i.e., taxed at a rate of 0%) whereas the supply of access to the trails would have been fully taxable.

The Minister of National Revenue assessed the registrant on the basis that section 138 of the Act applied to the combined supplies of admission and farm products.  Specifically, the Minister asserted (and the Tax Court of Canada agreed) that the principal supply was taxable access to the trails and the otherwise zero-rated supply of farm products was only incidental to the main supply, such that section 138 of the Act deemed the supply of farm products to form part of the taxable main supply.  This had the effect of rendering all sales taxable, and the Minister assessed accordingly.

At issue in 9056-2059 was whether section 138 of the Act applied.  The Federal Court of Appeal (per Trudel J.A.) noted that for section 138 to apply, each of the following conditions must be satisfied: (1) two or more supplies must be supplied for a single consideration; and (2) the provision of one of the supplies must reasonably be regarded as incidental to the provision of the other.  While the Federal Court of Appeal found that the first condition was met, the Court was not satisfied that the supply of food products was incidental to the supply of access to the trails.

Using the Canada Revenue Agency’s (“CRA’s”) Policy Statement P-159R-1: Meaning of the Phrase Reasonably Regarded as Incidental (revised on March 8, 1999) (“P-159”) against the CRA, the Federal Court of Appeal noted that while the disproportionate gap between the price of the first ticket and the quantity of honey to which the purchaser was entitled suggested that the provision of farm products was secondary to the provision of access to trails, that did not mean that it was incidental.  The production costs for honey and the honey-based products (approximately 89% of selling price) were found to be too significant for them to be considered small in comparison to the price of the first ticket.

Further, the Court noted that P-159 emphasizes that section 138 “is intended to apply in situations where the dollar value of the purported incidental supply is small. It generally will not apply to transactions where its application would have significant tax revenue implications”.  That is precisely what would happen here, if it applied.  Thus, the Court found that section 138 did not apply in the circumstances and allowed the registrant’s appeal.  As a result, for the period at issue, the registrant had to remit only the net tax resulting from its sales in connection with access to the trails.

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“Secondary” but not “incidental”: FCA provides guidance on s.138 of the Excise Tax Act in 9056-2059 Quebec Inc. v. The Queen

Canada Revenue Agency confirms that it will follow the decision of the Federal Court of Appeal in Bozzer v. Canada on interest relief for taxpayers

On November 21, 2011, the Canada Revenue Agency (CRA) issued a news release entitled “Taxpayer relief deadline is December 31, 2011“, which confirms that it formally accepts the interpretation of the 10-year limitation period for interest relief established by the Federal Court of Appeal in Bozzer v. Canada.

Before the Federal Court of Appeal decision in Bozzer, the CRA took the position that the Minister may exercise his discretion to cancel or waive interest otherwise payable under the Income Tax Act only if a taxpayer applies within 10 calendar years of the end of the taxation year in which the underlying tax debt arose. The Federal Court of Appeal in Bozzer held, however, that the Minister’s discretion allows for the cancellation or waiver of interest that accrues during the 10 calendar years preceding the calendar year in which the request for relief is made, regardless of the year in which the tax debt arose.

Although the Bozzer decision dealt with the interpretation of the 10-year limitation period for interest relief requests in the context of the Income Tax Act, the CRA confirmed in its November 21, 2011 news release that the 10-year limitation period will be interpreted in the same manner with respect to interest relief applications made under the Excise Tax Act, the Air Travellers Security Charge Act, the Softwood Lumber Products Export Charge Act, 2006, and the Excise Act, 2001.

Although the Crown did not seek leave to appeal the decision of the Federal Court of Appeal to the Supreme Court of Canada, it was unclear whether the CRA would actually follow and apply the FCA decision across the board.  For this reason, the news release is most welcome.

[Note: The author, along with David Spiro of Fraser Milner Casgrain LLP, acted as counsel for Mr. Bozzer in the Federal Court of Appeal – Ed.]

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Canada Revenue Agency confirms that it will follow the decision of the Federal Court of Appeal in Bozzer v. Canada on interest relief for taxpayers

Archived Webcast of the City of Calgary Hearing: Watch Argument in the Second GST Dispute Heard by the Supreme Court of Canada

For those who missed the live webcast of the hearing in City of Calgary v. The Queen before the Supreme Court of Canada on November 15, 2011, the archived webcast of the argument is now available.  McLachlin C.J. and LeBel, Deschamps, Rothstein, Cromwell, Moldaver and Karakatsanis JJ. heard the appeal.

Ken S. Skingle, Q.C. argued for the City of Calgary and Gordon Bourgard argued for the Crown. 

For our report on the argument, see our earlier post.  Judgment was reserved.

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Archived Webcast of the City of Calgary Hearing: Watch Argument in the Second GST Dispute Heard by the Supreme Court of Canada

How Will the Supreme Court of Canada Decide its Second GST Appeal? City of Calgary v. The Queen – Input Tax Credits (GST)

On November 15, 2011, the Supreme Court of Canada is scheduled to hear its second GST appeal in The City of Calgary v. The Queen. The first GST appeal was heard in 2009 in United Parcel Service Canada Ltd. v. Canada where it was unanimously decided that a customs broker was entitled to a rebate for overpaying GST.

In this case, the City of Calgary constructed a transit system for the use of Calgary residents pursuant to obligations imposed on it by the City Transportation Act, R.S.A 2000, c. C-14 (the CTA).  In the course of constructing that system, the City entered into funding agreements with the Province of Alberta as contemplated in the CTA.  The City paid GST with respect to purchases made for the construction of the transit system.

Since the provision of a municipal transit service is an exempt supply for purposes of the Excise Tax Act, R.S.C. 1985, c. E-15 (the ETA), the City would not be entitled to claim input tax credits (ITCs) with respect to purchases made for the purpose of providing that exempt supply.

The City took the position that the construction of the transit system (as opposed to its operation) was a separate supply to the Province of Alberta, pursuant to its contracts with the Province, for which the Province paid consideration, pursuant to those contracts.  The City took the position that this separate supply was not an exempt supply and claimed ITCs with respect to that supply.  The Minister rejected the City’s position.

The Tax Court of Canada decided in favour of the City, however, this decision was overturned by the Federal Court of Appeal.

The main issue for the Supreme Court of Canada is whether the City was entitled to an ITC in respect of approximately $6.3 million in GST paid in relation to the construction of a municipal transit system.  In answering this question, the Supreme Court of Canada may provide guidance on the meaning of “supply” for purposes of the ETA.

For the written submissions of the appellant, see the factum of the City of Calgary.

For the written submissions of the respondent, see the factum of the Crown.

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How Will the Supreme Court of Canada Decide its Second GST Appeal? City of Calgary v. The Queen – Input Tax Credits (GST)