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GOODS AND SERVICES TAX (GST) - Exempt supplies - Input tax credits

Monday, January 21, 2019 @ 10:39 AM  


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Appeal by International Hi-Tech Industries Inc. (IHI) from reassessments made in respect of input tax credits claimed in respect of payments made to patent agents, lawyers and payments made pursuant to two letters of credit and determining that GST was payable by the appellant on the sale of land. The appellant was a public corporation. Its business included the construction of buildings using completely manufactured prefabricated panels. In 2006, the appellant acquired two vacant lots from a friend of a shareholder who was paid with IHI shares. The lots were acquired as capital property but were never used, nor intended to be used, in the business of IHI. When the appellant sold the lots, GST was not collected from the purchaser on the basis that the sale was an exempt supply. The respondent reassessed the appellant GST on the sale. IHI engaged the DMCL accounting firm to prepare and audit the financial statements of IHI for 2006 and 2007. DMCL and IHI agreed that DMCL’s fees would be determined on the basis of time spent at its standard rates plus disbursements and GST. The appellant argued it never received any invoices from DMCL for the three payments the appellant made. In its GST returns, IHI treated the $80,000 paid by it to DMCL as being comprised of GST-included payments. The respondent determined that the three payments to DMCL were retainers or deposits, and that the right to claim input tax credits in respect of those payments arose only when the fees and GST actually became payable to DMCL, which did not occur until DMCL issued an invoice to IHI for the audit fee. The appellant had also paid invoices of patent agents. Each of the 84 patent agent invoices was addressed to the appellant’s mother company and described the mother company as the patent owner or as the applicant for a patent. In 2006, CNRL and IHI entered into contracts for the construction of buildings at CNRL's site. To secure its performance under the contracts, the appellant arranged for two letters of credit in favour of CNRL. In 2007, CNRL became concerned that the appellant would not be able to complete the contracts within the time specified, drew down $1,836,711 against the letters of credit and hired another contractor to complete the contracts. According to the appellant, when CNRL hired another contractor to complete the construction, CNRL was supplying to the appellant a service for which CNRL was entitled to receive consideration which was paid by drawing against the letters of credit. The respondent now conceded that the appellant was entitled to succeed to the extent of $19,200 for the amounts paid to a law firm and the accountants’ fees.

HELD: Appeals allowed in part in the amount of $19,200. The appellant was required to collect GST in the amount of $16,800 from the purchaser on the sale of land. The exceptions in s. 221(2) of the Excise Tax Act were not available. The appellant was not entitled to claim input tax credits in respect of the fees paid by it to the patent agents. It was not clear that the appellant acquired the services provided by the patent agents or that it consumed, used or supplied those services in the course of its commercial activities. Based on the invoices, it appeared that the mother company acquired the services provided by the patent agents. The appellant did not provide any evidence to establish that it acquired the services and provided no evidence of an agreement or other contractual arrangement between the appellant and the patent agents that required the appellant to pay for those services. The appellant was not entitled to credits in respect of the payments made by it to DMCL. The appellant failed to show that it complied with Regulations to provide sufficient information in such form as to enable the amount of the input tax credit to be determined. The appellant failed to prove that it paid any GST in respect of the payments made to CNRL under the letters of credit and failed to provide the required supporting documentation.

International Hi-Tech Industries Inc. v. Canada, [2018] T.C.J. No. 182, Tax Court of Canada, D.R. Sommerfeldt J., November 30, 2018. Digest No. TLD-January212019001