Héléna Gagné of Davies LLP has been kind enough to provide the following commentary (I am indebted to Guy Du Pont, Ad. E., for assisting in the collaboration):
The Queen v. Salaison Lévesque Inc.
(December 17, 2014 – 2014 CAF 296) (not yet translated into English), is the much anticipated outcome of Revenu Québec’s (“RQ”) ongoing attempt to deny the taxpayer of certain input tax credits (“ITCs”) on GST paid to placement agencies providing temporary labour services during the taxpayer’s peak seasons. The amounts at issue in this litigation were a relatively modest $12,000. However, this decision has been closely followed since apparently a number of other taxpayers are facing similar assessments from RQ.
The Tax Court of Canada (the “TCC”) had previously concluded in Salaison Lévesque Inc. v. The Queen
(2014 TCC 36) that Salaison Lévesque Inc. (“Salaison”) had shown that it provided RQ with all the information prescrbed by the Excise Tax Act (the “ETA”) and the Input Tax Credit Information Regulations (the “Regulations”) in order to be entitled to the disputed ITCs. The TCC had further held that the entitlement to such ITCs is not be lost simply because the taxpayer dealt with employment agencies that proved to be tax offenders, where the taxpayer itself was in good faith and fulfilled its obligations under the ETA.
The facts before the TCC were as follows:
• Salaison is registered in accordance with Part IX of the ETA.
• Salaison is a family business, founded in 1967, that specializes in the production and preparation of ham and ham products.
• The business of Salaison operates year‑round, but there are certain times of the year where demand is higher, such as major holidays like Christmas and Easter. Since the products that the appellant processes and sells are perishable, its customers require very short delivery deadlines sanctioned by substantial penalties for any delay.
• The business of Salaison employs around 75 people full time; at peak periods, roughly four per year, the appellant has to significantly increase its workforce.
• Throughout the periods at issue, the appellant retained the services of four employment agencies: Placement Tout Azimut, Alina, Production Plus inc. and Entreprises A. Bustos (the “Agencies”).
• Prior to retaining the services of an employment Agency, the taxpayer always verified the accuracy and truth of the GST registration numbers with the authorities.
• All the Agencies had a valid GST registration number during the periods at issue except Placement Tout Azimut, which indicated on its invoices that it would obtain its GST registration number shortly. As a result, the taxpayer logically (and, consistent with the ETA) then decided to not pay the taxes on those invoices and moreover did not claim the related ITCs.
• It communicated with the officers of the Agencies by telephone, facsimile or email.
• The hourly wage paid to the Agencies was substantially the same as the salary the taxpayer paid to its own employees.
• Occasionally, the taxpayer recruited some workers from the Agencies who subsequently became permanent employees.
• It later became apparent to RQ that the Agencies were involved in a scheme whereby the fisc was defrauded of revenue. The Agencies were delinquent, were paying their employees a miniscule salary, and were pocketing the QST and GST that had been paid to them rather than remitting it to RQ.
• RQ then denied the ITCs claimed by Salaison on the payments made to the Agencies, in the amount of $12,443.35.
• There was absolutely nothing in the evidence submitted by either side that showed collusion between Salaison and the Agencies.
• RQ also levied a penalty of $3,110.84 on Salaison.
• The business relationships between Salaison and the Agencies were standard and entirely consistent with customary business practices. No evidence showed anything that could cast doubt on Salaison’s good faith or that could suggest any negligence on its part.
The TCC concluded that the facts, on their face, demonstrated that Salaison had been denied its ITCs essentially because the fisc was unable to recover the amounts owed by the Agencies. This is clearly not the test set out in the ETA with respect to the eligibility of ITCs. The tax authorities cannot issue an assessment, based not on actual facts, but on the predetermined desire to recover an amount from anyone (even an innocent third party to the fraud, as was Salaison), and expect this assessment to stand. The TCC came to the conclusion that this flagrant lack of consistency on the part of RQ in applying the ETA meant that Salaison had demolished, on a prima facie basis, RQ’s assumptions underpinning the assessment.
RQ appealed to the Federal Court of Appeal (the “FCA”), challenging the TCC’s conclusion that Salaison had succeeded in establishing prima facie that the minister’s assumptions underlying the assessment were wrong. RQ argued that the conclusions of the TCC with respect to: i) the Agencies’ delinquency; and ii) Salaison’s good faith were superfluous, since their position was based on purported false invoices and the allegation that the Agencies were not carrying on a business. The FCA rejected these arguments by reminding RQ that the TCC had addressed these issues specifically because they had been raised by the Crown.
In addition, RQ argued that the TCC had reversed the burden of proof in requiring them to demonstrate that the services were not rendered by the Agencies and that the invoices were false.
The FCA concluded that the TCC has rightly determined that Salaison had met its prima facie burden by demolishing presumptions and assumptions made by the Minister. Once Salaison had demolished RQ’s assumptions on a prima facie basis, RQ then had the burden of proof to demonstrate the merits of its position by a preponderance of evidence, which it then failed to meet.
RQ also argued that the TCC misconstrued the evidence. The FCA concluded that the TCC had the discretion to draw a negative inference or not from the absence of witnesses, representatives of the Agencies in this case. The judge may take into account the context and all the evidence before him to decide whether it is appropriate to do so or not. The trial judge therefore did not err in refusing to draw a negative inference, especially since RQ itself had admitted that it was very difficult or near impossible to locate the Agencies.
Salaison proved that, to its knowledge:
• the Agencies were duly incorporated;
• the representatives of these Agencies appeared in their corporate registers as either shareholders or officers;
• the Agencies had places of business;
• payments passed through their bank accounts; and
• people listed as employees of the Agencies were confirmed to have been recruited and paid by these agencies.
As such, Salaison had met its burden of proof before the TCC, and such burden then properly fell to the Crown.
The FCA dismissed the appeal.
The Crown has until February 16, 2015 to seek leave to appeal to the Supreme Court of Canada.