572256 Ontario v. R. - TCC: Taxpayer entitled to ITCs on expenses incurred by its agent

572256 Ontario v. R. - TCC:  Taxpayer entitled to ITCs on expenses incurred by its agent


572256 Ontario Limited v. The Queen (June 9, 2017 – 2017 TCC 108, Paris J.).

Précis:  The appellant claimed investment tax credits (ITCs) in respect of HST paid by SVO-Phase Two Management Inc. (SVO) during the Appellant’s reporting period from April 1, 2013 to June 30, 2013 on the basis that SVO acted as its agent in paying the HST in question.  CRA denied the ITC claim and the appellant appealed to the Tax Court.  The Tax Court accepted the appellant’s evidence the SVO acted as its agent during the period in question and allowed the appeal.  There was no order as to costs since this was an informal procedure appeal.

Decision:  This case turned entirely on the evidence of the appellant’s witness, Mr. Stewart:

[3]             The Appellant’s shareholder, Mr. Donald AC Stewart, was the only witness at the hearing. He testified that the Appellant was the owner of two commercial rental buildings which formed part of a 16 building common–law strata complex constructed in the mid-1980s. The other buildings in the complex were owned by various individuals or companies, and certain common areas were owned together by all of the owners as tenants-in-common. The buildings were the subject of a co-tenancy agreement between all of the owners. The original co‑tenancy agreement was entered into in or around 1986, and a revised agreement was signed by the owners in October 2007.

[4]             Mr. Stewart produced a copy of an unsigned management agreement in respect of all of the buildings and common property dated May 6, 1986 between the owners and Collins Barrow Consultants Ltd. The evidence showed that Collins Barrow Consultants Ltd. subsequently changed its name to SVO-Phase Two Management Inc. and that the management agreement has continued in force between the parties up to the present.

[5]             According to the management agreement, SVO agreed to manage the maintenance and upkeep of all of the exterior elements of the buildings in the complex, as well as the common areas including the parking area, as agent for all of the owners. The owners paid their proportionate share of all of the expenses incurred by SVO on their behalf, including HST, and also paid a management fee to SVO.

[6]             Mr. Stewart testified that SVO was not set up to make a profit and that any excess funds it had at the end of the year formed part of a reserve fund belonging to the building owners. Mr. Stewart also testified that SVO was not a registrant under the Excise Tax Act and therefore had never claimed any ITCs for GST or HST paid in respect of any of the services that it contracted for on behalf of the owners. It was reimbursed by the owners for the GST or HST along with the actual cost of the services. The owners, such as the Appellant, then claimed ITCs relating to GST or HST reimbursed to SVO.

The Court rejected the Crown’s argument that Mr. Stewart’s evidence was insufficient:

[9]             The Respondent argues that there is insufficient evidence as to the existence of a bare trust or agency relationship between SVO and the owners, and that therefore it cannot be said that the expenses incurred by SVO were related to the commercial activities of the owners including the Appellant rather than of SVO itself.

[10]        I disagree. I accept that the management agreement produced by the Appellant at the hearing was in effect during the reporting period in issue and that it created an agency relationship between the owners (including the Appellant) and SVO. The agreement specifically states (at paragraph 2) that SVO “agrees as an agent of the Owners to enter into such contracts as are necessary for the upkeep and maintenance of the buildings and common property.”  SVO was also entitled to be fully reimbursed for the amount it expended on behalf of the owners. As I indicated at the hearing, it is regrettable that the Appellant was not able to provide a copy of the agreement to the Respondent before the hearing. However I have no concerns about the authenticity of the agreement that was finally produced.

[11]        With respect to the question of whether a bare trust exists in relation to the parking area acquired by SVO, I am prepared to except Mr. Stewart's testimony that the trust agreement was entered into at the time the parking area was purchased. I find it more likely than not that the owners only intended SVO to acquire legal title, given that they, the owners, provided the funds for the purchase. Again it is unfortunate that Mr. Stewart has been unable to find a copy of the agreement but I accept his testimony concerning the existence of the agreement.

As a result the appeal was allowed.  There was no order as to costs since this was an informal procedure appeal.