http://decision.tcc-cci.gc.ca/tcc-cci/decisions/fr/item/66736/index.do
In
Salaison Lévesque Inc. v. The Queen¸ the Agence du revenue du Québec[1][2] (“ArQ”) denied the input tax credits (“ITC”) claimed by the Appellant on the GST it paid to staffing agencies that, according to the Tax Court, were nothing but “[…] high-level tax delinquents” (paragraph 60).
In allowing the appeal, Tardif J. chastised the ArQ for its cavalier approach and concluded that the Appellant was not required to act as the “tax police” and could not be denied the ITC on the basis that its suppliers had not remitted the corresponding GST.
The basic facts of the case are simple. With regards to the Appellant, the Court stated the following:
[11] [TRANSLATION] The Appellant is a family business founded in 1967 that specializes in the production of ham […]
[13] The activities of the Appellant run throughout the year, but there are periods where the demands are higher, particularly during the main holidays, such as Christmas and Easter. […]
To alleviate the labour shortages during the busiest periods of the year, the Appellant retained the services of four (4) staffing agencies (the “Agencies”). Further to its audit of the Agencies, the ArQ generally concluded that the later did not make proper tax filings; did not have business premises; did not keep proper books and records; paid their employees in cash; and generally comported themselves with complete disregard to the most basic standards of corporate citizenship:
[32] In light of these conclusions, it is reasonable to conclude that it was obvious that these Agencies were not trustworthy and dishonest. They were real fraudsters with a single goal in mind: to enrich themselves at the cost of society and the exploitation of vulnerable and defenceless people.
The business relationship between the two parties was also examined by Tardif J., who insisted on the fact that the Appellant was careful and diligent in its dealings with the Agencies:
[23] Prior to hiring a staffing agency, the Appellant would always check the accuracy and veracity of the GST registration numbers with the authorities.
[24] All Agencies had a valid GST registration number during the periods at issue, except for Placement Tout Azimut, which was indicating on its invoices that it would soon receive its GST registration number. Logical and coherent, the Appellant therefore decided not to pay the sales tax on these invoices and also did not claim the related ITCs.
On the other hand, Tardif J. was highly critical of the assumptions relied upon by the ArQ in support of the reassessments:
[37] Seeing that it could not recover from the Agencies the amounts owing by them, the Respondent decided to assess the Appellant. First, it initially refused the deductions of the business expenses related to payments made to the Agencies, only to accept most of them later.
[38] It then assessed the Appellant for not having made source deductions, assuming rather that the Agencies’ employees were its own employees.
[39] Later, it acknowledged that services had indeed been rendered to the Appellant, and, consequently, the assessment was, again, canceled.
[40] Finally, the Respondent assessed the Appellant for the reasons given in the case subject of the appeal, i.e. the non-delivery of the appropriate amount of net tax because the ITC claimed on payments made to Agencies were rejected despite the fact that there is absolutely nothing in the evidence submitted by both sides that demonstrates some collusion between the Appellant and the Agencies.
The Court concluded that “the Appellant has been assessed mainly because the ArQ could not recover the amounts owed by the Agencies” (paragraph 52), which led Tardif J. to confirm that a taxpayer simply cannot be denied otherwise valid ITC on the basis that its suppliers did not remit the GST:
[62] If the legislator had intended that the taxpayer dealing with a subcontractor, who has exhibited delinquent fiscal behaviour, be jointly and severally liable for the amounts that its partner owed to the State, it would have expressly provided so, as it did concerning the contributions owed to the CSST [“Labour Health and Safety Board”]. It is not up to the Court to substitute itself to the legislator.
[63] In the absence of specific measures, one cannot be held liable for the tax obligations unmet by a tax partner, unless of course one was in collusion with that partner. […]
[64] The primary mission of a company is to generate income translating into profitability; it is not to act as the police of the tax authority.
Since no evidence was adduced which allowed the Court to conclude in the bad faith, negligence, or carelessness of the Appellant (paragraph 97), the Court found in its favour:
[121] For all these reasons, I conclude that the Appellant has shown that it provided ArQ 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.
[1] This commentary was provided through the courtesy of Nicolas X. Cloutier and Mouna Aber of Davies. I am indebted to Guy Du Pont, Ad. E., for initiating the collaboration.
[2] 2014 TCC 36.