Kosma-Kare Canada Inc. v. R. – TCC: Taxpayer not entitled to ITC’s – placement agencies were providing false invoices

Bill Innes on Current Tax Cases

http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/66382/index.do New Window

Kosma-Kare Canada Inc. v. The Queen (January 14, 2014 – 2014 CCI 13, Lamarre J.).

Précis: This is another decision involving false or “accommodation” invoices issued by placement agencies. The principals of the appellant knew that the individuals involved in the placement agencies had a chequered past and had been specifically warned by the Quebec Revenue Agency about using these placement agencies. The appellant ignored the warning. The Court found that the invoices were in fact accommodation invoices which did not entitle the appellant to ITCs. The facts justified opening otherwise statute barred years and the imposition of gross negligence penalties.

Decision:  This is a decision denying ITCs in respect of allegedly false invoices or accommodation invoices issued by placement agencies:

[1] The appellant is appealing from an assessment dated March 3, 2011, made by the Minister of Revenue of Quebec (Minister) pursuant to Part IX of the Excise Tax Act (ETA), whereby input tax credits (ITCs) of $59,560.40 claimed by it for the period from April 1, 2006, to June 30, 2010, were disallowed.

[2] The Minister submits that these disallowed ITCs are related to the acquisition of supplies of services from employment agencies that the appellant did not in fact acquire and for which it received false invoices or accommodation invoices. More specifically, the ITCs disallowed were those claimed by the appellant with respect to invoices for $29,886.46 and $29,673.94 from two separate suppliers, 9167-4523 Québec Inc. (9167) and 9199‑9201 Québec Inc. (9199), also known as Solutions Oxford, respectively (see subparagraph 15f) of the Reply to the Notice of Appeal).

The principals of the placement agencies involved had, on the evidence, a long history of suspect dealing, of which the principals of the Appellant (Mr. Chaouki and Mr. Frenette) were aware. The Appellant had been warned in 2005 by the Quebec Revenue Agency about the danger of using these specific placement agencies but appeared to have ignored that warning. The Court concluded that the Appellant was not entitled to any ITC’s with respect to the services allegedly rendered by the placement agencies:

[73] In the circumstances and on the evidence before me, I find that the appellant did not make a prima facie case that the Minister’s assumptions—i.e., (1) that the appellant did not receive the services it claims to have received from 9167 and 9199, namely the supply of personnel within the framework of genuine commercial transactions, (2) that the workers in question were in fact the appellant’s employees, and (3) that the supporting documentation submitted consists of accommodation invoices whose purpose was to enable the appellant to claim ITCs to which it is not entitled—are erroneous. It is therefore the appellant that must bear the responsibility for the loss of entitlement to its ITCs with respect to the amounts paid to these two agencies.

[74] As for the statute-barred period, the respondent must prove that the appellant made a misrepresentation attributable to neglect, carelessness or wilful default as contemplated by subsection 298(4) of the ETA. There is neglect if the appellant did not act with reasonable care (Venne v. Canada (Minister of National Revenue), 1984 CarswellNat 210, 84 DTC 6247). As regards the penalty imposed under section 285 of the ETA, the respondent must prove that the appellant knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in a return (this implies negligence greater than a lack of reasonable care).

[75] In my opinion, the respondent showed that the appellant did not act with reasonable care. The respondent has satisfied me that Mr. Chaouki and Mr. Frenette did not act in all innocence. As stated above, they gave the ARQ officers to understand that they realized that the workers may well have been illegal or people who did not want to report their income officially. They even said that they really did not have any choice if they wanted to fill their orders on time.

[76] Despite the warning the ARQ gave the appellant in 2005 regarding workers supposedly from the agencies in question here, it agreed to work with people without concerning itself with whether these individuals had work permits from the Department of Immigration or a SIN or an official address, thinking that the blame would be placed on the agencies with which they were dealing. The legal opinion they allegedly received was not submitted nor were clear explanations provided as to the exact information on which the opinion would have been based. To my mind, the respondent showed that the appellant did not act with care or with a minimum of due diligence and thereby displayed wilful blindness. In my opinion, that was a demonstration of indifference as to compliance with the ETA that can be defined as negligence amounting to gross negligence (Venne, supra, at paragraph 37 CarswellNat, page 6256 DTC). In my view, the appellant must accept the serious consequences of its actions.

[77] The appellant’s claim for ITCs must therefore be rejected for the above-stated reasons. It should however be mentioned that, if the appellant had not known about the illegal scheme and had not been warned by the ARQ, the outcome of this case may have been different. I do not, however, have to rule on this question.