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Goods and Services Tax

Special rules

Taxpayer reassessed as no evidence of consent to act as agent of third party

N, who was sole shareholder of P Inc., incorporated P Inc. to carry out renovations on hotel owned by numbered company owned by N’s friend A. In February 2011, numbered company granted power of attorney to P Inc. and gave P Inc. power to act for numbered company in all matters pertaining to hotel. A signed direction to pay authorizing disbursement of CMHC funds to P Inc. and specifying that P Inc. was appointed to act for A in matters pertaining to mortgage and to manage and finish renovations. N paid renovations out of own pocket on each floor, and, once floor passed inspection, CMHC advanced funds which would be disbursed to P Inc. in accordance with direction to pay. No management agreement existed between N and A and P Inc. did not invoice A or numbered company for work. P Inc. was reassessed for net harmonized sales tax (HST) of $47,314.05 for reporting period from January 1, 2011 to March 31, 2011. In November 2012, Minister assessed P Inc. in respect of making of taxable supplies, and HST collectible was $69,492, input tax credits were $25,992.07 interest was assessed of $3,168.17 and failure to file penalty was $1,739.98. In March 2014, Minister reassessed P Inc. disallowing input tax credits previously allowed. In 2015, Minister further reassessed P Inc.’s ITCs of $22,177.95 resulting in net tax liability of $47,314.05. P Inc. appealed as to Minister’s finding of its net tax liability. Issue for determination was whether numbered company consented to P Inc. acting as its agent regarding renovations. Appeal dismissed. P Inc. was not acting as agent for numbered company for renovations since numbered company did not consent, explicitly or implicitly, to P Inc. acting in that capacity. Evidence did not establish that A expressly consented to agency relationship with P Inc. for renovations or that it gave implicit consent to do so. Only evidence submitted with respect to renovations was that P Inc. performed functions that general contractor would normally do. P Inc. failed to show that it was acting as agent for numbered company in performing these functions.
Persepolis Contracting Inc. v. The Queen (2017), 2017 CarswellNat 2477, 2017 TCC 89, Sylvain Ouimet J. (T.C.C. [Informal Procedure]).


Income tax

Capital gains and losses

Taxypayer’s securities trading gains reassessed as income

Taxpayer maintained two investment accounts at company, one for Canadian and one for U.S. dollar positions. Taxpayer’s strategy was to invest in diversified securities that had potential for 30 percent returns. In early 2009, taxpayer liquidated holdings in both accounts and converted them in cash to supposedly pay off mortgage. Taxpayer, however, purchased and sold stocks costing about $2.5 million. Taxpayer’s total gain was $550,000. Taxpayer reported his gains and losses on these positions as capital gains in his 2009 income tax return. Canada Revenue Agency (CRA) reassessed to include full amount in income. Taxpayer appealed. Appeal dismissed. Reassessment characterizing gains as income gains was not incorrect. Taxpayer was trading in securities as business activity, or at least was buying and selling securities as part of adventure in nature of trade. Taxpayer’s primary intention when purchasing securities was to sell them at profit as soon as reasonable return could be realized. Taxpayer spent considerable time each day monitoring markets beyond what he said was required for his employment. Nature of gains realized by taxpayer buying and selling securities in his investments accounts bore close similarity to what he was doing in his investment dealer positions for decades. Taxpayer was buying and selling throughout year, and his holding periods were clearly short and often very, very short. On balance of probabilities, taxpayer did not satisfy Court about his mortgage paydown plans. There were no bank documents showing when taxpayer committed to renew mortgage. Surely at some point in first part of taxpayer’s 2009 reinvestment activities, he realized that he was picking securities for quickest target cumulative return. Combined results of not being able to conclude taxpayer’s investment strategy was unchanged in 2009 or that he liquidated in 2009 in order to pay off mortgage, and not having been given detailed evidence regarding prior years meant Court only considered actual activity in his accounts in 2009. Taxpayer’s expertise extended to what he regarded as trading activities; whilst his securities trading activities in 2009 may not have risen to level of him carrying on business of trading securities, they appeared to handily meet all of requirements to have been considered adventure or concern in nature of trade. Taxpayer was not treated differently or singled out because his investments were in securities.
R. v. Foote (2017), 2017 CarswellNat 1729, 2017 TCC 61, Patrick Boyle J. (T.C.C. [General Procedure]).


Goods and Services Tax

Administration and enforcement

Sole officer, director and shareholder not entitled to represent corporation

Corporation filed motion seeking order to allow Z to represent corporation in action. According to Z’s affidavit, he was sole officer, director and shareholder of corporation. No details were provided as to financial situation of corporation and it was not alleged that corporation was unable to pay. Relevant rule was in s. 30(2) of Tax Court of Canada Rules (General Procedure). Rule did not provide specific requirements as to when relevant leave was to be granted. It was left for court to develop reasonable criteria taking into account variety of circumstances. Motion dismissed. Corporation had not demonstrated that it was unable to pay for counsel. With over $115,000 at stake, this was not case where legal costs would overwhelm amount at issue. Case was not as easy or straightforward as corporation believed it to be. Based on documents that corporation attached to notice of appeal and on reply filed by Minister of National Revenue, biggest amounts in issue appeared to be related to output tax. Based on materials, assessment was in large measure based on Minister’s analysis of deposits into corporation’s bank accounts and into Z’s bank account. Corporation seemed to claim that deposits into Z’s account related to Z’s business unrelated to corporation’s business. Organizing evidence of detailed nature relating to all deposits in issue and all input tax credits in issue was not likely to be easy or straightforward. Both corporation’s submissions and affidavit asserted that all of corporation’s representations were pure factual documents and that documents were unavailable in audit process. It was not clear that Z understood that he would have to testify to explain documents and put them in context to show errors in bank deposits analysis and to show why certain input tax credits were justified. Z would not be able to adequately represent corporation. There was no necessity to allow agent because of inability to pay counsel, given that amount in issue was significant, that it was not shown that Z was able to adequately represent corporation, and given public interest in having effective trial process while attempting to limit costs.
WJZ Enterprises v. R. (2017), 2017 CarswellNat 1404, 2017 TCC 57, Gaston Jorré J. (T.C.C. [General Procedure]).


Income tax

Tax credits

Claim for scientific research and experimental development tax credit was disallowed

Taxpayer was natural health product company, whose president was naturopathic doctor. Doctor formulated three new natural health products for taxpayer, evaluating condition to be treated, conducting systematic review of others’ clinical studies and literature, corresponding with other professionals and calculating ingredients by drawing on his expertise. Doctor did not run clinical trials due to expense and because they were not required for licensing of natural health products. Taxpayer claimed scientific research and experimental development (SR&ED) tax credit for activities related to such formulation. Minister reassessed taxpayer under Income Tax Act, disallowing SR&ED credits. Taxpayer appealed. Appeal dismissed. There was scientific uncertainty in three projects to develop these products mimicking existing pharmaceuticals and, in two projects’ reformulation to use existing pharmaceutical, in identifying supplemental natural ingredients to lessen adverse side effects. Doctor hypothesized formulations but there was no testing performed to assess effectiveness or any other aspect of these products. Products were reformulated only in response to Health Canada either not approving hypothesized formula or removing restriction on doctor’s preferred ingredient. Absence of any testing resulted in uncertainty as to whether any of formulations represented any form of advancement of scientific knowledge. Newly hypothesized formulation could not on its own be considered either knowledge or advancement of knowledge. Jurisprudence had clearly and consistently interpreted definition of SR&ED as requiring some testing of hypotheses for there to be systematic investigation or search carried out by means of experiment or analysis, although such testing did not necessarily have to be in form of clinical testing. Taxpayer’s activities did not satisfy definition of SR&ED.
Life Choice Ltd. v. R. (2017), 2017 CarswellNat 219, 2017 TCC 21, Patrick Boyle J. (T.C.C. [Informal Procedure]).


Goods and Services Tax

Alternative method of valuation was not warranted in circumstances

Registrant operated restaurant with 60 seats in dining room and 66 seats on terrace, with liquor licence. Registrant’s accounting books submitted to Minister were incomplete and imprecise according to Minister, and Minister had to reconstitute total amount of supplies made by registrant using several indirect methods of verification for period in question. Analysis of various elements from registrant or its suppliers, such as bank deposits, purchases confirmed and reported, hours worker, placemats used, revealed significant deviation from sales reported in registrant’s accounting books. Minister considered sales of 3,228 meal receipts, from 50 randomly targeted days over period of 166 days. Total sales accounted from receipts amounted to $32,655.79. 1,676 of targeted foods from meal receipts generated a ratio of $19.48. Difference between declared sales and reconstructed sales was $488,631.67 for years 2007 to 2009. Minister therefore increased total amounts of targeted foods acquired by registrants by attributing $19.48 ratio for each of 2007, 2008, and 2009 fiscal years in determining reconstituted amount of taxable supplies. Registrant appealed. Appeal allowed. Alternative method of valuation was not warranted in circumstances, and was highly questionable. Despite alternative verification method, assessed amounts were reduced by 40 per cent demonstrating that glaring error were committed when checking. Penalties for gross negligence were also cancelled and no contribution for misappropriate of funds was issues by CRA against registrant. Both experts came to conclusion that valuation method led to bias and instability as assumptions that underlie ration estimation were not met. Valuation method was wrong given over-representation of Mondays and Tuesdays when only two meals rather than three meals were served on those particular days. Instead of resorting to indirect method of valuation, tax authorities should have first concluded, on reasonable grounds, that books, records, and supporting documents provided by registrant were not reliable or contained inaccuracies or significant deficiencies.
2741-2568 Québec Inc. c. R. (Sep. 22, 2016, T.C.C. [General Procedure], Réal Favreau J., 2011-3640(GST)G) 270 A.C.W.S. (3d) 891.


Goods and Services Tax

Minister was justified in using alternative audit method to assess registrant

Registrant operated pizzeria restaurant, primarily providing pizza for takeout. Minister carried out audit into three years of quarterly reporting periods. To determine amount of unreported sales, auditor used alternative method consisting of comparing reported sales with quantity of pizza boxes purchased for year in which sales recording module was operational and then extrapolating results to prior years for which such detailed information was not available. Minister issued assessment under Excise Tax Act (Can.), claiming additional net tax amount of $23,768.85, penalties of $5,942.23 under s. 285 of Act, and interest. Registrant appealed. Appeal allowed in part. Minister was justified in using alternative audit method to assess registrant, as registrant’s books and records could not be considered reliable. Evidence clearly established that registrant did not report all its income. Auditor’s method had significant weakness in that it did not take into account 14-inch pizza boxes in calculation. According to auditor’s calculation excluding 14-inch pizza boxes, 55.69 per cent of sales were reported but, if 14-inch boxes were used, result indicated that almost 70 per cent of sales were reported. Auditor dismissed 14-inch pizza boxes because according to sales recording module, there were more sales than purchases, but calculation could not provide true reflection of reality without including 14-inch pizzas that were registrant’s best-selling pizza size. This supported conclusion that 30 per cent of registrant’s sales were unreported such that only $12,802.35 should have been added to net tax. Registrant knowingly, or under circumstances amounting to gross negligence, made false statement or omission in its tax returns for period. Factors, such as cash register drawer remaining open between sales so that sale data would not appear in sales recording module and fact that unreported sales represented 30 per cent of total sales, showed gross and not just ordinary negligence. Significant and repeated omissions in tax returns led to conclusion that registrant intentionally concealed significant portion of its sales.
9091-2239 Québec Inc. v. R. (Sep. 14, 2016, T.C.C. [General Procedure], Dominique Lafleur J., 2015-710(GST)I) 270 A.C.W.S. (3d) 664.

Family Law


Father failed to engage exception in s. 118(5.1) of Income Tax Act (Can.)

Taxpayer father and mother separated in 2011 and had two children under 18 years of age. Pursuant to consent order, father and mother had joint custody of children in shared parenting arrangement. Father had obligation to pay child support to mother for both children and mother had obligation to pay child support to father for both children, resulting in set-off requiring only father to make child support payments. Order specifically permitted mother to claim child tax credit for both children for first six months of year and father for last six months of year, and each of father and mother to claim one child as equivalent to spouse. Minister of National Revenue disallowed father’s claimed non-refundable tax credits relating to eligible dependant and eligible child respectively. Father appealed. Appeal dismissed. Father failed to engage exception in s. 118(5.1) of Income Tax Act (Can.). Utilization of set-off mechanism did not render, memorialize or transform each distinct value in mathematical calculation in determining final child support payment into support amount under Act. Engagement of combined effect of s. 118(5) and (5.1) of Act required mandatory and actual periodic payments by both spouses to each other in cases of shared parenting of two or more children, demonstrated by documentary and evidentiary record.
Harder v. R. (Sep. 14, 2016, T.C.C. [Informal Procedure], Randall S. Bocock J., 2014-3977(IT)I) 270 A.C.W.S. (3d) 442.

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