DAVID D. HAGGART, Appellant, v. HER MAJESTY THE QUEEN,, 2003 TCC 185

Docket: 2002-2186(GST)I BETWEEN: DAVID D. HAGGART, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeal heard on January 8, 2003 at Nanaimo, British Columbia Before: The Honourable Judge L.M. Little Appearances: Agent for the Appellant: Larry K.

Myres Counsel for the Respondent: Michael Taylor ____________________________________________________________________ JUDGMENT The appeal from the assessment made under the Excise Tax Act, notice of which is dated March 27, 2001 and bears number 11CU2300070, is dismissed, without costs, in accordance with the attached Reasons for Judgment. Signed at Vancouver, British Columbia, this 31st day of March 2003. "L.M. Little" J.T.C.C. Citation: 2003TCC185 Date: 20030331 Docket: 2002-2186(GST)I BETWEEN: DAVID D. HAGGART, Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT Little, J. A.

FACTS : [ 1 ] Haggart Construction Ltd. ("Construction") was incorporated under the Company Act of the Province of Alberta on December 31, 1979. [ 2 ] The Appellant owned 99% of the shares of Construction and his wife owned 1% of the shares of Construction. [ 3 ] Construction was involved in several phases of the construction industry in Fort McMurray, Alberta. [ 4 ] Construction obtained a loan (the "Loan") from the Canadian Imperial Bank of Commerce ("CIBC").

On April 15, 1989 officials of CIBC called the Loan by demanding payment. [ 5 ] Prior to 1991 the Appellant and Construction commenced a court action (the "Court Action") in the Court of Queen's Bench of Alberta against the CIBC. In the Court Action the Appellant and Construction claimed damages for: (

i) loss of income; (ii) loss of future income; (iii) loss of investment; (iv) punitive damages; and (

v) defamation, in respect of the wrongfully calling of a bank loan by CIBC in 1989 which had the effect of forcing Construction out

of business [ 6 ] As a result of the Court Action the Appellant and Construction received Judgment from the Court in 1998 which ordered that the CIBC pay the following amounts to the Appellant and Construction: (i) $463,200.00 as damages for loss of income for the years 1989 to 1999; (ii) $18,500.00 representing damages suffered as the result of a forced sale of investment assets; (iii) $20,000.00 as punitive damages; and (iv) $368,566.22 in accrued interest under the Judgment Interest Act of Alberta. [ 7 ] The Plaintiffs were also awarded costs. [ 8 ] CIBC filed a Notice of Appeal to the Alberta Court of Appeal but they abandoned their appeal. [ 9 ] Although Construction was forced to discontinue its business in 1989 the Appellant continued to carry on business in the construction industry.

From 1990 to 1996 the Appellant worked in the construction industry in British Columbia. From 1997 to 2000 the Appellant worked as a sole proprietor in the construction industry in Fort McMurray, Alberta. [ 10 ] The Appellant was a registrant under the Excise Tax Act (the " Act ") effective March 7, 1996. [ 11 ] In January 2000 and April 2000 the Appellant filed his Goods and Services Tax ("GST") returns for the reporting periods from April 1, 1996 to March 31, 2000, reporting GST of $24,226.36, claiming input tax credits of $46,474.51 and claiming net refunds of $22,248.15.

The Minister disallowed input tax credits of $26,193.24 that were claimed by the Appellant. The input tax credits that were disallowed were claimed with respect to the legal fees paid by the Appellant in connection with the Court Action commenced by the Appellant and Construction against the CIBC. The input tax credits apply specifically for the period 1996 to 2000. B. ISSUE [ 12 ] Is the Appellant entitled to claim input tax credits of $26,193.24? C. ANALYSIS [ 13 ] On the 28th day of March 2002 Mr. Ron H.

Brass, Appeals Team Leader of the Canada Customs and Revenue Agency (the "CCRA") sent a Notice of Decision to the Appellant. The Notice of Decision contained the following statement: Based on a review of the evidence provided, it is the Agency's position that the legal fees were not acquired for the "consumption, use or supply in the course of your commercial activities", as required by subsection 169(1).

The legal fees were acquired in respect of a court action which resulted in you receiving a damage award which is not considered to be consideration for a supply and thus not part of your commercial activity. [ 14 ] Mr. Larry Myres, C.A., the agent for the Appellant, maintained that the GST, paid on the legal fees, are claimable as input tax credits since they relate to services acquired for commercial purposes in the recovery of lost business income. [ 15 ] Michael Taylor, counsel for the Respondent, argued that the Appellant was not eligible for input tax credits for the following reasons: 1.

The Court Action was not commenced in the course of commercial activities but was a claim for compensation. 2. If the Court Action is found to be commenced in the course of commercial activities, when the Court Action was commenced the commercial activities were not those of the Appellant but were those of Construction which is a separate legal entity. 3.

If the Court Action were commenced in the course of commercial activities and if you find them to be commercial activities of the Appellant, the Minister's position is that no input tax credits can be claimed because the legal services were not acquired for the purpose of making taxable supplies for consideration. [ 16 ] In support of Point 3 above, Mr. Taylor referred to a number of Court decisions. In Two Carlton Financing Ltd. v. Canada, [1998] T.C.J.

No. 447 , Judge Rip said at paragraph 37: In accordance with subsection 169(1) of the Act, ITCs are available where tax on inputs in respect of a supply becomes payable or is paid by a registrant person. Recovery of the tax paid is limited to the extent that the inputs were acquired for consumption, use or supply in the course of commercial activities of the person. [ 17 ] Judge Rip then quoted a decision of Judge Garon (now Chief Judge) in Nineteen Ninety Clothing Co. Inc. v.

The Queen , [1994] G.S.T.C. 89 (T.C.C.), at 89-5 where Judge Garon said: ... the purchaser of a taxable supply is entitled to an input tax credit and can recover from the government the tax he has paid to the extent that this purchaser uses that good or service in the production of other taxable supplies. [ 18 ] In Two Carlton Financing Ltd. Judge Rip also said at paragraph 37: ITCs are generally unavailable unless the inputs for which the ITCs are claimed were used in the production of other taxable supplies.

(Note: In this situation, Mr. Haggart did not produce "other taxable supplies". As a result of the Court Action (for which input tax credits were claimed on the legal fees paid) Mr. Haggart obtained or received "damages"). [ 19 ] Counsel for the Respondent also referred to Blanchard (c.o.b. Four Pillar Financial) v. Canada, [2001] T.C.J. No. 484 . In that case Judge Bowie said at paragraph 19: The result of finding there to be only one business is that the entitlement to ITCs falls to be determined under sections 169, 141 and 141.01 of the Act. Complex though these are, they may be summarized this way.

Entitlement to ITCs arises only to the extent that goods and services tax has been paid on property or services that have been acquired for the purpose of making taxable supplies for consideration. [ 20 ] While it does not have the force of law I believe that is useful to quote from a Ruling released by the CCRA on March 14, 1996 (See No. 96 GT1 447).

The Ruling dealt with the question of whether a registrant under the Act (a self employed selling agent) could claim input tax credits on the GST paid re. legal fees incurred when he commenced a lawsuit following an automobile accident. (Note - the agent was awarded general damages in the lawsuit.) [ 21 ] In the Ruling the following explanation is provided: Pursuant to subsection 169(1) of the Excise Tax Act (Act), a GST-registrant is generally entitled to claim back, as an ITC, the GST paid or payable on personal property and services (for example, legal services) based on the extent to which the property or service is acquired for consumption, use or supply in the course of the registrant's commercial activities.

Further, subsection 141.01(2) of the Act clarifies that the acquisition of a particular property or service by a person is considered to be for consumption or use in the course of the person's commercial activities to the extent the property or service is acquired for the purpose of making taxable supplies . (emphasis added) Therefore, in order for you to be eligible to claim an ITC for the GST paid on the legal services, the legal services must be acquired by you for the purpose of making some GST-taxable supply.

Under the circumstances you have presented, there is no evidence to link the acquisition of the legal services to any GST-taxable supply (either of property or a service) that you have made, or intend to make. As a result, our position is that you are not entitled to claim any amount of the GST paid on the legal services as an ITC. [ 22 ] In considering the application of

section 169 of the Act , I do not believe it could be said that the Appellant commenced the Court Action or paid the legal fees for the purpose of making or producing taxable supplies . [ 23 ] I have therefore concluded that the Appellant does not qualify for input tax credits with respect to the GST that he paid on the legal fees. [ 24 ] The appeal is dismissed, without costs. Signed at Vancouver, British Columbia, this 31st day of March 2003. "L.M. Little" J.T.C.C. CITATION: 2003TCC185 COURT FILE NO.: 2002-2186(GST)I STYLE OF CAUSE: David D.

Haggart and Her Majesty the Queen PLACE OF HEARING: Nanaimo, British Columbia DATE OF HEARING: January 8, 2003 REASONS FOR JUDGMENT BY: The Honourable Judge L.M. Little DATE OF JUDGMENT: March 31, 2003 APPEARANCES: Agent for the Appellant: Larry K. Myres Counsel for the Respondent: Michael Taylor COUNSEL OF RECORD: For the Appellant: Name: Firm:

For the Respondent: Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada