2015 QCCA 1398, 2015 QCCA 1398

2774577 Canada inc. (9278-3455 Québec inc.) c. Agence du revenu du Québec 2015 QCCA 1398 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No.: 500-09-023498-132 (500-80-008835-077) DATE: September 3, 2015 CORAM: THE HONOURABLE YVES-MARIE MORISSETTE, J.A. NICHOLAS KASIRER, J.A. MARTIN VAUCLAIR, J.A. 2774577 CANADA INC. (recently merged with T. Lauzon Ltd., doing business as 9278-3455 Quebec Inc.) APPELLANT – Plaintiff v. L’AGENCE DU REVENU DU QUÉBEC RESPONDENT - Defendant JUDGMENT [ 1 ] THE COURT : On appeal from a judgment of the Court of Quebec, District of Montreal (the Honourable Judge Jean-F.

Keable), rendered on March 12, 2013, that dismissed an appeal from a decision on an objection, confirming a notice of assessment. [ 2 ] For the reasons of Morissette, J.A., with which Kasirer and Vauclair, JJ.A. agree: [ 3 ] DISMISSES the appeal with costs. YVES-MARIE MORISSETTE, J.A. NICHOLAS KASIRER, J.A. MARTIN VAUCLAIR, J.A. Mtre Marc-André Côté Bélanger Longtin Mtre Michel Beauchamp Legal counsel For the appellant Mtre Jean Duval and Mtre Brigitte Landry Revenu Québec Larivière Meunier For the respondent

Date of hearing: October 29, 2014 REASONS OF MORISSETTE, J.A. [ 4 ] This appeal raises issues of tax law with regard to the application of the Act Respecting the Québec Sales Tax [1] (the “AQST”). [ 5 ] The appellant appeals from a judgment of the Court of Quebec, district of Montreal (the Honourable Judge Jean-F. Keable), rendered on March 12, 2013, that dismissed its appeal from a decision on an objection, confirming a notice of assessment. [ 6 ] For the reasons that follow, I am of the view that the appeal should again be dismissed, with costs. I.

Overview of the facts [ 7 ] This case arises out of circumstances that, for the most part, are either admitted or not contested. The trial judge outlined the relevant facts at paragraphs [4] to [17] of his reasons. I will therefore provide no more than a brief

summary for the moment in order to situate the case in its general context, but will provide further details below as needed. [ 8 ] During the period relevant to the case, the appellant operated a poultry slaughter business that processed approximately 450,000 units per week. For the capture, caging and transportation of this poultry from the chicken coop to the slaughterhouse, it used an intermediary, Yves Sarrazin, who made arrangements with various sub-contractors. Among them was a [ translation ] “chicken trapper” [2] named Jean-Guy Fontaine (“Fontaine”).

He employed six tradesmen to perform work that cost the appellant several hundred thousand dollars a year. [ 9 ] The services of Mr. Fontaine were remunerated according to a specific formula, based on the number of kilos of chicken delivered to the slaughterhouse. For this purpose, after receiving and analyzing the deliveries, the appellant’s purchasing manager would prepare a voucher each week for amounts ranging, for the most part, from $15,000 to $18,000. [3] The appellant would then issue a cheque to Mr. Fontaine for the amount thus established.

From April 2002 until May 2006, the period covered by the respondent’s notice of assessment, the appellant claimed and obtained various input tax refunds (“ITR”) from the respondent for the services that Mr. Fontaine provided to him as well as the remuneration, including taxes, that it paid to him. [ 10 ] To get reimbursed, the appellant would fill out the forms required by the applicable regulations, in particular the Regulation respecting the Québec sales tax [4] (the “Regulation”).

In accordance with this regulation, the appellant had to provide various information and supporting documentation, including [ translation ] “the registration number assigned to the supplier under

section 415 of the [“RQST”]”. To do so, during the entire relevant period, the appellant wrote the number 1017109681 TQ 0001 on his refund requests. On February 28, 1999, Mr. Fontaine had provided this number to the appellant as being his, by fax, when it began using his services. [ 11 ] Pursuant to an audit conducted in 2006, the respondent concluded that this number did not permit ITR claims. Moreover, the file revealed the following facts, which the judge related in his reasons: [ translation ] [17] On November 2, 2006, Ms. Demelo [the auditor of the Agence] obtained a declaration from Mr.

Fontaine in which he admitted not having declared [ translation ] “to the tax people” his [ translation ] “chicken catcher” income. A few days later, on November 17, 2006, Mr. Fontaine made an assignment of his property. For the period from 1995 to 2005 or 2006, the proofs of claim filed with the trustee were in the amount of $1,041,497.16 under the Excise Tax Act , $1,665,787.23 under the RQST, and $ 3,889,314.71 $ under the Taxation Act . [5] Not surprisingly, the tax authorities received no payment before or after Mr. Fontaine’s death in November 2007. Even before Mr.

Fontaine’s bankruptcy, the respondent sent the appellant a notice of assessment dated July 19, 2006, pursuant to which it claimed the ITRs paid out between April 21, 2002, and April 30 2006. The amount claimed, including interest, was $234,622.56, based on ITRs totalling $193,657.49. II Judgment under appeal [ 12 ] The trial judge began his analysis by repeating, correctly, that the presumption of validity of assessments must be applied in this case. This presumption is found at

section 1014 of the Taxation Act [6] (the “TA”), the relevant portion of which provides the following:

Sous réserve des modifications ou de l'annulation résultant d'une opposition, d'un appel ou d'un appel

sommaire et sous réserve d'une nouvelle cotisation, une cotisation est réputée valide et tenante nonobstant toute erreur, vice de forme ou omission qui s'y trouve ou qui se trouve dans toute procédure s'y rattachant. 1014. An assessment shall, subject to being varied or vacated on an objection, appeal or

summary appeal and subject to a reassessment, be deemed to be valid and binding notwithstanding any error, defect or omission in the assessment or in any proceeding relating thereto. According to the case law, a taxpayer may rebut this presumption by making a prima facie case. This consists of submitting proof of

invalidity that is preponderant [7] – and thus credible – but that may also be rebutted by opposing evidence that is at least equally probative. [ 13 ] After citing the provisions of the applicable laws and regulations and having noted the similarity of parallel provisions in the federal laws and regulations, the judge reviewed the evolution of the case law interpreting these provisions. [8] He concluded that the appellant simply did not satisfy the regulatory requirements as it failed to submit with its refund requests a [ translation ] “registration number assigned” to Mr. Fontaine [ translation ] “in accordance with

section 415 de la [ AQST ]”. For ease of reference, I reproduce this provision below, along with another provision, which I will cite first, that appears to me to be of utmost importance to understanding the tax regime applicable to this case: 407.

Toute personne qui effectue une fourniture taxable au Québec dans le cadre d'une activité commerciale qu'elle exerce au Québec est tenue d'être inscrite sauf dans le cas où, selon le cas: 1° la personne est un petit fournisseur; 2° la seule activité commerciale de la personne consiste à effectuer la fourniture d'un immeuble par vente, autrement que dans le cadre d'une entreprise; 3° la personne ne réside pas au Québec et n'y exploite pas d'entreprise; 4° (paragraphe abrogé) . 407.

Every person who makes a taxable supply in Québec in the course of a commercial activity engaged in by the person in Québec is required to be registered, except where (1) the person is a small supplier; (2) the only commercial activity of the person is making supplies of immovables by way of sale otherwise than in the course of a business; or (3) the person is not resident in Québec and does not carry on any business in Québec; (4) (paragraph repealed) . […] 415.

Le ministre peut inscrire toute personne qui lui présente une demande d'inscription et, à cette fin, le ministre, ou toute personne qu'il autorise, doit lui attribuer un numéro d'inscription et l'aviser par écrit, au moyen d'un certificat d'inscription, de ce numéro ainsi que de la date d'entrée en vigueur de l'inscription. Le certificat d'inscription doit être gardé au principal établissement de son titulaire au Québec et est incessible. 415.

The Minister may register any person applying to be registered and, for that purpose, the Minister, or any person he authorizes, shall assign a registration number to the person and notify the person in writing by way of a registration certificate of the registration number and the effective date of the registration.

The registration certificate shall be kept at the principal establishment of its holder in Québec and may not be transferred. [ 14 ] Finally, referring more specifically to the submissions of counsel for the appellant, the judge concluded his analysis with the following comments (we will see over the following pages how the lexical distinctions referred to by the judge seemed to take on importance in the dispute, both at trial and on appeal): [ translation ]

[43] The attorney for 2774577 seeks to establish that the computerized QST validation file reacts differently depending on the numbers entered to obtain information, which is why it is important to always use the correct term. In this regard, he asked the Court to consider various dictionary

definitions. This exercise has no significance in regard to the requirements of

section 201 of the AQST and the Regulation. Moreover, all the

definitions consulted simply reveal that the most frequently used qualifying term by the representatives of the Agence, i.e. [ translation ] “bad number”, captures the

definitions of the word [ translation ] “invalid” (that which is not valid) and [ translation ] “inactive” (that which is not active or which is inoperative). He thus dismissed the appeal. III. Grounds of appeal raised by the appellant [ 15 ] It appears to me worthwhile to quote the complaints set out by the appellant in its factum before assessing whether they are well founded.

First of all, it insists on the fact that it was not only invoking its own good faith in contesting the notice of assessment, but also that there were specific legal reasons that should have convinced the judge to rule in its favour. [ 16 ] The appellant then submits the following three arguments, which it describes as [ translation ] “the appellant’s theory” (which I quote): [ translation ] (

a) The registration number provided to the respondent by FONTAINE was valid for the purposes of the AQST and the RQST [the Regulation ] as proof was provided that FONTAINE was assigned this number, without it being established that this number was, after being attributed, cancelled or suspended in any manner whatsoever allowing one to conclude that it did not exist. The AQST and the RQST do not require a purchaser to verify the validity of a registration number to render its ITR request admissible, but they do require that the supplier provides the attributed registration number to the respondent. (

b) the fact that the supplier is a tax offender is not a reason to refuse ITRs, as nowhere in the AQST or the RQST is it required that the supplier declare the QST that it collected and remit it to the state for its ITRs to be considered admissible. (

c) the respondent has a claim only against FONTAINE, and as a result of the fact that he made an assignment of his property, it does not benefit from any lien or particular right in regard to this claim that would allow it to collect directly from the appellant the amounts that FONTAINE failed to declare and remit. IV. The merits of the appeal [ 17 ] I will begin by saying at the outset that the appellant’s third complaint appears to me to be bold to the point of being contrived. The issue between the parties has absolutely nothing to do with Mr.

Fontaine’s bankruptcy or, a fortiori , the status of the respondent’s bankruptcy file or the status, which remained potential, of the appellant. It appears certain that the appellant could have instituted an action against Mr. Fontaine as of May 2006, [9] and that at the same time or afterward, it could also have made a claim in his bankruptcy, likely as an unsecured creditor, for the ITRs claimed by the respondent. It did not do so.

We know, moreover, that the respondent did not fail to get involved in the bankruptcy as it filed a claim for $6,596,599.10, which as far as we know did not lead to any recovery. [ 18 ] This is all very well, but what is the connection? Legally, there is none. It follows that the only question really at issue is whether the notice of assessment dated July 19, 2006, should be confirmed, which it will be if the appellant is unable to rebut the presumption of

section 1014 of the TA – in other words, the notice of assessment must be considered valid if, at the outset, the appellant failed to comply with the requirements of the AQST and the Regulation in claiming ITRs that were reimbursed by the respondent. [ 19 ] The appellant sees two aspects to this question: (

i) evidence of the nonexistence of Mr. Fontaine’s registration number was not established, and (ii) Mr. Fontaine’s tax offences cannot constitute an obstacle to the input claims of the appellant, who, after all, paid what was claimed from it. Let us consider. A. Impact of the supplier’s registration number on the notice of assessment [ 20 ] In its oral and written arguments, the appellant focused on

section 1014 of the TA and what constitutes an effective rebuttal of the presumption of validity of an assessment. It is sometimes difficult to understand the nature of its complaint. But I think that, at the beginning of this dispute, before a certain argumentative one-upmanship began to overshadow the real issue, the parties had very well circumscribed the dispute between them. [ 21 ] I will first review the report of the auditor Demelo, filed as an exhibit. She stated the following: [ translation ] According to the MRQ, Volaille Grenville is not entitled to the ITC/ITRs claimed.

According to section 164(4) of the ETA [the Excise Tax Act [10] ] and 201 of the AQST , the documents were not compliant. Mr. Marcil (Vice-President of Finance and Administration of the group that owns the appellant) submitted that he had no way of knowing that their supplier was not registered. He blames the MRQ for not having more closely monitored those who receive taxes without being registered. Mr. Marcil submits that it is the MRQ’s responsibility to recover the amounts and that Volaille Grenville acted in good faith and has nothing to do with this.

He submits that Volaille Grenville paid these invoices with tax and is entitled to claim the ITC /ITRs. The mandatary explained that the chicken industry is not easy and that the events of the past year have struck a significant blow to the poultry industry. People are consuming less poultry because of the avian flu. The financial results were bad.

Mr. Marcil emphasized that Volaille Grenville would have to take legal action against Mr. Fontaine and that this would entail additional costs for the company. He was of the view that the amounts would not be recovered and the invoices would only increase. Mr. Marcil was unable to establish that he conducted an assessment of the numbers. The MRQ is of the opinion that the mandatary is not entitled to the ITC/ITRs claimed.

As described here, the positions on both sides are clear. [ 22 ] Let us now consider what the appellant submitted in its notice of objection, filed as exhibit P-2 (and which the respondent included in its exhibits, the appellant having been quite selective in the preparation of its own exhibits). I quote the following but note that several of the facts alleged in this excerpt, although they may seem a priori plausible, were not established by evidence in due and proper form at trial.

The appellant stated the following: [11] [ translation ] The existence of Revenu Québec’s online validation service was announced to taxpayers only around the second half of 2003 in “TAX NEWS (2nd and 3rd quarters 2003)”. Thus, this service was not offered during the entire period relevant to the notice of assessment. The telephone service, for its part, was of little use because the prohibitive waiting time rendered its occasional use costly. From the auditor’s perspective, the company should have verified all its suppliers’ QST numbers monthly.

There are limits to the time and efforts that Revenu Québec can require from its mandataries. Moreover, until recently, Revenu Québec employees were hesitant and even flat-out refused to provide information regarding the QST numbers of third parties. Here again, it is all perfectly clear. [ 23 ] Let us now see what the appellant submits. In order to understand the appellant’s contention, we must review certain facts, which, according to my understanding of the file, could all have been taken as true by the trial judge. They are the following: ― The number provided by Mr.

Fontaine to the appellant on February 28, 1999, was 1017109681 TQ 0001. ― Mr. Fontaine obtained this number on September 26, 1994. ― According to the [ translation ] “Auditor’s Report” P-16 drafted by auditor Demelo and dated July 4, 2006, [ translation ] “the tax numbers of the registrant [Fontaine] had been inactive since January 1995”. She also noted that [ translation ] “he registered in September 1994. In December 1994, the numbers were cancelled”. Ms. Demelo testified to this effect at trial. ― On September 26, 2006, i.e. after the notice of assessment that is the subject of this appeal was issued, Mr.

Fontaine filed an “Application for Registration of a sole proprietorship” to obtain a registration number. In this document, he described his principal activity as [ translation ] “real estate agent”.

The number attributed to him at this time was 1017109681 TQ 0002 – identical to the one obtained on September 26, 1994, except for the very last number. [ 24 ] I repeat what the trial judge wrote at paragraph [19] of his reasons: [ translation ] “although the company acknowledges having conducted no verifications in the QST file between 1999 and 2006 by telephone or letter or online, it asserts its good faith and complete ignorance of Mr. Fontaine’s tax offences …”. Testifying on the number obtained from Mr.

Fontaine, the witness Ghislain Marcil, Vice- President of Finance and Administration of the group that formerly owned the appellant, stated the following: [ translation ] Q. Do you agree that Fontaine’s number was invalid or inactive? A. Inactive yes O.K. Q. O.K. It was bad. It did not exist. Regardless of the term used. Do you agree with that? A. Yes O.K. I agree with the fact that yes, it was inactive. Q. O.K. But you never received information that was contrary to the effect that Mr. Fontaine’s number was still, let’s say, valid, active, open, good? A.

The information that we had when we were dealing with him, the request that he had provided to us, that’s the information that I had. Q. O.K. And in your answer to me, you are relying on the declaration of February ninety-nine (99)? A. Of February ninety-nine (99), yes. [ 25 ] At trial and before the Court of Appeal, the appellant endeavoured to establish, by way of various exhibits constituted by screenshots, that the information available to users of goods and services on the respondent’s website was contradictory and likely to mislead.

It submitted the following documents: [ translation ] Exhibit Page Number Entry date Comments

P-8 RF 74 1017109681 TQ 0001 Jean-Guy Fontaine May 15, 2006 1:51pm “Inactive” P-10 RF 85 1017109681 TQ 0001 Jean-Guy Fontaine succ January 31, 2013 2:21pm “Inactive Effective date of status: 1995-01-01” P-13 RF 87 1017109681 TQ 0001 Jean-Guy Fontaine succ February 6, 2013 7:38am “Inactive Effective date of status: 1995-01-01” P-14 AF 96 1017109681 TQ 0003 February 6, 2013 7:44am ”Nonexistent” P-15 AF 97 1117109681 TQ 0001 February 6, 2013 No indication of time “The identification number is Invalid” It should be noted that, with the exception of exhibit P-8, dated May 2006, these other exhibits were retrieved either the day before the trial or during the trial.

It should also be noted that the numbers indicated on exhibits P-14 and P-15 differ by one digit from the number provided to the appellant on February 28, 1999. This number, 1017109681 TQ 0001, appears, however, on exhibits P-8, P-10 and P-13. From its date, exhibit P-8 is very likely the document on which Ms. Demelo based her conclusion, in the spring of 2006, that the number provided by the appellant on February 28, 1999, was invalid. What is certain, according to her testimony, is that in her opinion, the information was completely unambiguous.

Moreover, she confirmed to the Court that she had given exhibit P-8 to Mr. Marcil when she met with him to discuss the notice of assessment, and Mr. Marcil himself, during his testimony, stated, in regard to exhibit P-8: [ translation ] “… I think it was Ms. Demelo who gave it to me.” [ 26 ] What can we conclude from the foregoing? First of all, that the scattered bits of information submitted by the appellant do not make a prima facie [12] case that the notice of assessment was invalid.

Wondering about the significance of the questions the appellant’s attorney was asking the witness Gélinas (whom he had called), the judge asked, [ translation ] “Does your ship have a destination?” Upon reading the transcripts of the testimonies, one can understand the judge’s concerns. [ 27 ] It then becomes necessary to conclude that this entire debate is pointless for a very simple reason.

Even if we assume that the information made available to the public by the respondent is likely to mislead, which I am not ready to accept for the reason that I will explain later, this would have no significance here because, in the appellant’s case, this can only constitute a circumstance with no causal connection. The appellant, I repeat, conducted no external verifications of the number of a supplier, who, according to the testimony of Mr.

Marcil, caused it to spend between $500,000 and $600,000 annually (if not more, looking closely at the numbers). [ 28 ] Moreover, the testimonies of the witnesses Demelo (the auditor) and Gélinas (a manager employed by the respondent) as well as the documentary evidence in the file (including exhibits P-10 and P-13), provided a sufficiently adequate foundation on which the trial judge could base his main conclusion.

He expressed it in the following terms: [ translation ] “the Court is of the view that the basis of the notice of assessment is the compliance or non-compliance of the acts or omissions of 2774577 with the requirements of

section 201 of the AGST, complemented by the Regulation ”. In failing to provide a [ translation ] “registration number attributed to the supplier”, it exposed itself to the claim that is the subject of the notice of assessment, a conclusion that is consistent with the case law cited by the judge at trial. B. Impact of the supplier’s status as a tax offender on the notice of assessment [ 29 ] The appellant also submits that Mr.

Fontaine’s failure to remit the taxes he collected to the respondent is not a reason to refuse its ITRs (or require that he pay them back, as is the case here, the refund having already been made). This manner of presenting the problem is misleading. Between the appellant and the respondent, Mr. Fontaine’s tax conduct can be characterised as res inter alios acta. The appellant is required to pay back what it was refunded, regardless of the facts or Mr.

Fontaine’s conduct, because it did not comply with the strict requirements of the AQST and the Regulation. [ 30 ] In reality, the position taken here by the appellant exceeds the legal context of its relationship with the respondent. [ 31 ] If the appellant had really been misled by the information provided by the respondent, it stands to reason that this factor would have weighed heavily in the resolution of the dispute between the parties. But the situation must be assessed from the point of view of a

reasonable person. I do not think that such a person, discovering that a registered number is [ translation ] “inactive” or [ translation ] “nonexistent” or [ translation ] “invalid” would think they were well-founded to act without conducting any further verification, as though the number at issue were described as [ translation ] “active” or [ translation ] “existing” or [ translation ] “valid”. Words have meaning, even in tax law. And in any event, as I just explained, that is not what took place here. [ 32 ] While testifying at trial, the auditor Ms. Demelo made a comment that is worth emphasizing here.

During her meeting with Mr. Marcil, she gave him documents, the contents of which she summarized as follows: [ translation ] In these documents, it was also explained that it would be a good idea for companies to perhaps implement a process. This is not to say that it is necessary to verify the suppliers each time they issue an invoice, as that would be too arduous in any event.

It also stands to reason that the respondent, a public service, has the obligation to put in place an efficient and easily accessible system to make widely available the information required from taxpayers when they claim a refund under the AQST and the Regulation. And there is no doubt that adopting a suspicious or fault-finding attitude of a tax farmer-general ( fermier général ) in no way promotes or supports the honesty or loyalty of as many taxpayers as possible, conditions that are essential to the proper functioning of a tax system based on self-assessment.

But the record as it stands does not allow us to say any more on this aspect. V. Conclusion [ 33 ] For these reasons, I would dismiss the appeal with costs. YVES-MARIE MORISSETTE, J.A.