Pépinière A. Massé Inc. v. R. – TCC: GST, accommodation invoices – Court throws out statute-barred years and penalties

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Pépinière A. Massé Inc. v. The Queen (September 12, 2015 – 2015 TCC 271,Paris J.).

Précis: The appellant had a business harvesting strawberry plants. It used agencies to provide day labourers to assist in the harvesting. It was denied ITCs on the invoices from these agencies because they were “accommodation invoices” supplied by companies that did not have the resources to provide the services described. The Court agreed that these were in fact accommodation invoices but concluded that the Crown had not demonstrated gross negligence on the part of the appellant and the appeal was allowed in respect of the statute-barred periods and to delete the penalties in respect of the non-statute barred periods. No costs were awarded as both parties had a limited success.

Decision:  This is another case involving the denial of GST Input Tax Credits on the basis that they arose out of “accommodation invoices”:

[1] The appellant is appealing from an assessment made by the Minister of Revenue of Quebec under Part IX of the Excise Tax Act (the ETA) denying input tax credits (ITCs) in the amount of $45,951.42 for the periods from October 1, 2003, to December 31, 2009, and imposing penalties in the amount of $11,744.02 under section 285 of the ETA.

The appellant was in the business of wholesaling strawberry plants.

[8] The appellant harvests strawberry plants in the spring and fall. Those harvested in the spring are for export to the United States, while those harvested in the fall are sold in Quebec. The plants are cleaned and categorized and put into baskets and boxes in the sorting room located in the appellant’s warehouse on the farm. The appellant uses subcontractors to provide temporary workers to do this work, for which they are paid on a piecework basis. The appellant also has a few employees who are responsible for supervising the work and for quality control. At harvest time, each subcontractor supplies 35 to 40 workers to the appellant, and staff turnover was very high.

[9] Alain Massé testified that during the periods at issue he had dealt with three subcontractors: Ms. Cuc (also called “Marguerite”), her husband Dung Hoang, and Mohan Singh Chandi. They transported the workers by bus to the appellant’s farm and helped supervise their own workers. With regard to Ms. Cuc and Mr. Hoang, Mr. Massé said that, until 2007 or 2008, he dealt rather with Ms. Cuc, but that Mr. Hoang subsequently took over and that Ms. Cuc no longer came.

[12] During the periods at issue from October 1, 2003, to October 1, 2005, Ms. Cuc and Mr. Hoang billed the appellant under the name Chan Maureen. Starting in October 2006, they invoiced under a new name each season. Mr. Massé testified that Ms. Cuc and Mr. Hoang informed him at the beginning of the season, that is, in the spring or in the fall, of the name in which they wished the payments to be issued by the appellant for the temporary workers they supplied.

[13] Mr. Massé testified that Ms. Cuc or Mr. Hoang always gave him reasonable excuses for the name changes, but did not provide any clarification in that regard. He also said that he asked them, each time there was a new name, to provide him with information on the new entities, and that Ms. Cuc or Mr. Hoang gave him corporate charters or similar documents and the GST and QST registration numbers of the new entities. Mr. Massé said that he then asked Daniel Rainville, the appellant’s external accountant, to verify that the tax numbers were valid. According to him, the tax numbers thus provided were always valid at the time.

[14] Mr. Rainville confirmed that Mr. Massé asked him to verify the tax numbers and that the numbers provided were valid at the time of verification.

[15] For most of the periods at issue, Mr. Chandi used his company 3943828 Canada Inc. (which operated under the name HD Farm) to bill the appellant. However, according to Mr. Massé, Mr. Chandi billed the appellant using the following two companies, with respect to which the Minister denied ITCs:

9174-5141 Québec inc.

9162-7208 Québec inc.

[16] Mr. Massé did not specify how or when Mr. Chandi informed him that he used these other companies, and not HD Farm Services, nor did Mr. Massé say whether Mr. Chandi had provided any reason for the change. The information obtained by the appellant in 2012 from the Registraire des entreprises du Québec reveals that Mr. Chandi was neither a shareholder nor a director of those corporations and that the sector in which the two corporations operated was the manufacture of clothing.

The Court held that the various corporations that had issued the invoices at issue in this appeal had not in fact provided services to the appellant in the non-statute barred periods:

[51] Given the evidence filed by the respondent, I find that the businesses whose names were on the invoices for the non-statute-barred periods in question provided no services to the appellant because they had neither the staff nor the resources needed to do so. According to the auditors’ investigations, those businesses were [suppliers of accommodation invoices] in the clothing industry and did not report the taxes collected on the amounts they invoiced for their alleged services. They used cheque-cashing centres for the cheques they received and the audits conducted on-site revealed little or no commercial activity. In light of this evidence, largely uncontradicted by the appellant, I am of the view that it is not likely that these businesses, which were defrauding the government, were at the same time carrying on legitimate activities in the field of personnel placement. In my view, it is probable that these businesses were consistent in their operations and that they did not provide services to the appellant.

However in the case of the statute-barred periods the Court held that the respondent had not met the evidentiary onus required to open those periods:

[47] In the circumstances, given the evidence adduced at the hearing, I do not believe that, as regards the statute-barred periods, the appellant was neglectful or careless in not inquiring or checking further with regard to Ms. Cuc or Mr. Hoang or 9163, and the respondent did not succeed in demonstrating that the appellant should have suspected that Ms. Cuc or Mr. Hoang did not honestly identify the supplier of workers. I conclude that the appellant regularly verified the tax numbers of the businesses that invoiced it for the workers and that the numbers were valid during the relevant periods. In addition, in 2006, there had not yet been the frequent changes of businesses by Ms. Cuc and Mr. Hoang that occurred later.

[48] In addition, the evidence adduced at the hearing does not allow me to conclude that the appellant was in collusion with Ms. Chan or Ms. Cuc. I find that it did not receive any undue advantage because of the transactions at issue.

Similarly, on the question of penalties the Court held the respondent had not demonstrated gross negligence on the part of the appellant:

[63] First, the respondent has not shown that the appellant participated in the false invoice scheme in this case. There is no evidence that leads me to believe that the appellant received an advantage from the false invoices.

[64] For its part, the appellant, in my view, took reasonable precautions to ensure that the businesses on the invoices existed and were registered in accordance with the ETA, and therefore it was not negligent in its ITC claims.

[65] Mr. Massé requested the entity’s registration documents, for example, its articles of incorporation, from Ms. Cuc and Mr. Hoang each time they changed the name on the invoices, and he asked Mr. Rainville, the appellant’s accountant, to verify the tax numbers of the corporations and businesses used by the subcontractors.

[66] In my view, the respondent has not established that the appellant’s approach with regard to the changes of the businesses used by Ms. Cuc, Mr. Hoang and Mr. Chandi starting in the spring of 2006 was so inadequate as to amount to gross negligence. On the contrary, it seems to me that the appellant was, rather, an innocent victim of a false invoice scheme.

In the result the appeal was allowed in respect of the statute-barred periods and to delete the penalties in respect of the non-statute barred periods. No costs were awarded as both parties had a limited success.