http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/108633/index.do
9114-4766 Québec Inc. v. The Queen (February 2, 2015 – 2015 TCC 25, Lamarre J.).
Précis: This is a recently translated decision of Lamarre J. rendered before she was appointed Associate Chief Justice. Essentially the case dealt with 7 number companies which acquired software with the intention of starting net businesses which would provide financial simulation services. Each of the corporations claimed ITCs. The Minister denied the ITCs and imposed penalties under section 285 of the Excise Tax Act (the “ETA”) on the basis that they had never in fact entered into commercial activities since the web sites were never operative.
Justice Lamarre accepted the Crown’s position that commercial activities never commenced but allowed the appeals to delete the penalties on the basis that the appellants “believed that they were acquiring real supplies, which would become essential to their business” [para. 85].
No costs were awarded as these were all informal procedure appeals.
Decision: This decision is factually rather complex but in the end boiled down to two issues: a. had commercial activities commenced, and b. had the Crown justified the imposition of penalties.
The factual background in brief:
[8] To understand the dispute, it would be helpful to provide a brief historical background on how the appellants acquired their e-commerce solution. It is worth describing the events that took place from 2001 to 2005.
[9] Jean Renaud is the instigator of the entire project that led to the incorporation of the appellants. In his testimony, he explained that he wanted to provide an online service that enabled individuals to improve their knowledge about personal finances. According to his testimony, the contemplated service consisted in providing a tool that would make it possible to make a detailed financial simulation, which would be located in the paid part of the Web site. A free part of the Web site had to provide the user with financial information and the possibility of creating a budget. For Jean Renaud this was an innovative project that he had designed because of the significant growth of the Internet at that time. He began to talk about the project with his brother Steve, who worked in information technology. He said that the need to hire programmers made his project very costly. His strategy was to design the service and then to find a way to distribute it.
[10] Jean Renaud's business plan was that several independent corporations would provide the same financial simulation service on their own Web sites. Jean Renaud testified that, for the success of the project, the distribution of the service was just as important to him as its design. He said that he had tried to establish a network of people geographically spread out all over Quebec, who would be able to attract a diverse clientele. At the outset, there were 17 companies like those of the appellants who were asked to sell the financial simulation service once the e-commerce solution was designed. The other companies did not appeal the assessments.
The problem was that no web sites were ever operative:
[70] Thus, even though the appellants' witnesses claim that the software and the Web sites were completed, the e-commerce solution was never implemented by the appellants' supplier, Expert-conseil. The reason that was given to justify the fact that none of the Web sites was launched was the lack of funding, which prevented the appellants from being able to maintain the service that they wanted to provide.
[71] The appellants remained at the preliminary stage and never began operating their businesses and generating revenue from the sale of subscriptions to their Web sites because, among other things, they never wanted to personally invest in the project. The financial feasibility of a project is a fundamental step in creating a business. In this case, the appellants incurred practically no financial risk and did not want to incur any. The appellants were at the stage where they needed to find the funding necessary to breathe life into their project. To do so, they were counting only on government assistance in the end. They were still at the stage of organizing the businesses they were planning to operate and were not at that point financed so that they could one day earn income from them.
As a result of this the Court concluded that commercial activities had never commenced:
[74] Even though the appellants' witnesses intended to promote the service when it was ready to be sold, I am of the view that their activities were still at the preparatory stage and that the measures essential to the claim that the appellants had started operating a business and therefore engaging in a commercial activity were not seriously implemented.
[75] Accordingly, I conclude that the Minister was correct in disallowing the ITCs for the periods at issue.
However the Court held that the Crown had not made out a case for the imposition of penalties:
[85] In this case, although the appellants had no commercial activity, software and Web sites were being developed. The appellants believed that they were acquiring real supplies, which would become essential to their business.
[86] I also acknowledge that the individuals who had founded the corporations later acquired by Jean Renaud and his mother, Pauline Leroux, did not testify. However, with regard to penalties, the onus is on the respondent to make out a case for gross negligence. Considering the testimony of the appellants’ other witnesses, the respondent did not satisfy me that the situation was different for those two other people when they had incorporated their companies.
[87] For all of these reasons, the appeals are allowed and the assessments at issue are referred back to the Minister with the sole purpose of deleting the penalties.
There was no order as to costs since these were all informal procedure appeals.