Syscomax Inc. v. R. – TCC: Taxpayer not liable for GST penalty on payment to subcontractor

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Syscomax Inc. v. The Queen (June 19, 2014 – 2014 TCC 202) was a case in which the Crown alleged that the appellant paid an “accommodation amount” to a subcontractor and therefore was assessed to deny the ITCs it had claimed on the payment and with penalties in respect of the ITCs claimed:

[2] The Appellant, Syscomax Inc. (“Syscomax”), has carried on a construction business for over 30 years. For most of that time it has specialized in the construction of specialized buildings and structures such as those used in the aviation, pharmaceutical and food service industries. Syscomax is principally a general contractor and plays a management role in its construction projects.

[3] In 2003, Syscomax entered into a contract with Plaisirs Gastronomiques Inc. (“Plaisirs Gastronomiques”) to construct a large addition to its food products plant. Plaisirs Gastronomiques was in the business of producing and marketing ready-to-serve dishes. The existing Plaisirs Gastronomiques plant was originally constructed, and has since been expanded, by Syscomax. The 2003 addition was to add an additional 5000 square feet to its approximately 50,000-square-foot plant. The building systems and the food service equipment were to be integrated into the existing plant. This addition was to be built by Syscomax on a turnkey basis for a price of approximately 5.5 million dollars. The work was to be completed within a period of less than 6 months.

[4] The job involved a large number of contractors and subcontractors performing all of the work necessary to build such an addition and to integrate its systems and equipment into the existing Plaisirs Gastronomiques plant. The construction project required a large number of workers, up to 100 at a time on the work site.

The Input Tax Credit

[5] The only invoice challenged as an accommodation invoice is that of 9128- 5882 Québec Inc. operating under the name TFX. According to Syscomax, it hired TFX to provide labour for the Plaisirs Gastronomiques project. TFX’s bill for October 2003 was for $315,000 plus good and services tax of $22,050 and Quebec sales tax of $25,278.75.

[6] The purchase order and TFX’s bill specified that the services were for [TRANSLATION] “the installation of the processing equipment, providing mechanical coordination, the installation of the washing units and of the equipment and conveyor software and the start-up of all this equipment, including training in its use.”

[7] The Respondent assessed Syscomax for a total of $43,524.66, including interest and penalties. It is the Respondent’s position that TFX was not the supplier of the labour or any other goods or services to Syscomax, either directly, or indirectly through subcontractors, and that, accordingly, Syscomax is not entitled to an ITC in respect of its payment of the TFX bill. The Respondent maintains that TFX did not have the capacity to provide either directly or indirectly the services in question and that TFX in fact did not even contract with Syscomax to do so. These were among the assumptions made by the Respondent in denying Syscomax’s ITC claim and set out in her Reply.

The court rejected the appellant’s claim for ITCs on the TFX payment on the basis that there was not sufficient evidence to support the claim:

[19] The Court concludes that the Appellant, Syscomax, has been unable to produce sufficiently credible, complete and consistent evidence to satisfy the Court that TFX did, on a balance of probabilities, supply services to it with respect to the Plaisirs Gastronomiques plant expansion project. It is most telling that no one from Syscomax, or anyone else, was able to place a single TFX worker on the work site, or to claim to have met with anyone from TFX to draw up the purchase order, inspect the completed work, review the bill, or turn over the cheque. Further the project manager did not testify, though he would have been the Syscomax representative who drew up the TFX purchase order. The evidence that is before the Court does not allow it to conclude on a balance of probabilities that, to use the field superintendent’s term, the “rental guys” were rented, either directly or indirectly, from TFX.

[20] It is also revealing that Syscomax seems to have never before or since had any dealings with TFX or Mr. Grignon. No one was able to say that he or she saw or met with anyone from TFX in connection with the purchase order, the bill or the cheque in payment for the work performed, or that anyone from TFX had ever attended at the premises of Syscomax or Plaisirs Gastronomiques for any reason whatsoever.

[21] Also of great concern is the TFX purchase order’s being out of numerical and chronological sequence. The only other purchase order not in proper numerical and chronological sequence was sequential by month, just not by day. The TFX purchase order was significantly out of sequence, by several hundred purchase order numbers. Mr. Robitaille’s explanation, while possible, was simply unsatisfactory and insufficient given the other concerns in this case.

[22] For these reasons, the Court dismisses the Appellant’s claim for an ITC with respect to services supplied to it by TFX.

On the issue of penalties however the court found that the Crown had not met the onus of sustaining the penalty assessment:

[25] To support its position that Syscomax knew, or ought to have known, that the TFX invoice was from someone other than TFX, Revenu Québec relied largely upon the fact that Mr. Grignon said that neither he nor TFX had ever contracted with the Appellant, submitted an invoice to the Appellant, or been paid by the Appellant. Given Mr. Grignon’s history, including the issuing of false invoices and accommodation invoices for ITC purposes, his testimony alone is insufficient for the Respondent to satisfy her burden of proof with respect to the penalties. Ms. Gisquet’s explanation that she accepted Mr. Grignon’s version of events because he had admitted to other false invoice and accommodation invoice offences and so had no reason to lie about Syscomax, was astonishingly simplistic, unconvincing and quite insufficient in the circumstances.

[26] Revenu Québec also relied upon the fact that its investigation of TFX turned up no business records whatsoever for TFX, but that is of very little assistance in enabling it to provide any of the proof required in order to satisfy this Court on the issue of the imposition of penalties on Syscomax.

[27] As stated above, on the totality of the evidence the Court does not find that TFX did not provide labour services to Syscomax for the Plaisirs Gastronomiques project. The Court simply finds the Appellant’s evidence insufficient for a conclusion that TFX provided such services to it. It does not follow that a third party provided the services or was paid for them. It does not follow that Syscomax knew or ought to have known that the TFX invoice was false, was actually from another person, or was questionable. It therefore does not follow that the Appellant had any clear obligation to make further inquiries regarding TFX or regarding TFX’s provincial registrations, head office address, list of available subcontractors, financial institutions, et cetera.

In the result the ITC claims were disallowed but the penalties were set aside.