Deferred ITCs – no requirement to net against credit and debit notes

Quinco Financial Inc (Formerly Landex Investments) v The Queen, 2013 TCC 20

There were two issues at trial:

1. whether the appellant was entitled to claim residual Input Tax Credits (“ITCs”) pursuant to subsection 169(1) of the Excise Tax Act (the “Act”) and whether paragraph 232(3)(c) of the Act applied to the residual ITCs.
2. whether the Minister of National Revenue (the “Minister”) reassessed the appellant within the statutory time limit pursuant to subparagraph 298(1)(a)(i) of the Act.

The Court held that the amount of the ITCs crystallized at the time the invoice was issued y the supplier and absent the application of section 232, there is no requirement that the amount of the ITCs be adjusted to reflect credit and debit notes.  Also, the time for the MNR to reassess does not being until the period where the deferred ITCs are claimed.

FACTS

There was an agreed statement of facts. The Company, through its various iterations, was registered for GST and had a monthly reporting period with a year end of February.   In the relevant returns, the company reported tax collected, claimed ITAs, and reported net tax.

In its monthly reporting periods ending November 30, 2000, December 31, 2000, February 28, 2001, between October 1, 2001 and February 28, 2002 and between August 1, 2002 and December 31, 2002.  During each deferral period, the company received credit notes from or issued debit notes to various suppliers, each specifying a GST allocatable amount.

In each of the GST returns filed for march 2001, march 2002, and July 2003, the company claimed previously unclaimed ITCs for GST paid for supplied during the deferral period.

The taxpayer claimed ITCs claims on property and services acquired in the course of its commercial activity for tax planning purposes, but later claimed the deferred amount sin its GST returns.  It first claimed “netted GST”, being the Gross ITC amount less the GST on credit and debit notes.  In issuing and receiving notes, the taxpayer didn’t adjust its net tax pursuant to paragraph 232(3)(c), which it ought to have done.   Upon review by KPMG the taxpayer was told that it could claim ITCs in the gross amount for the referral periods, and there was no need to net the amounts during the deferral periods – which the taxpayer then did.

ARGUMENTS

The Taxpayer argued  that pursuant to subsection 169(1), the amount of ITCs are determined at the time each supplier first issued the invoice and is not subject to subsequent adjustment under any provision of the ETA as a result of a later note received or issued.  Notes received or issued result in addition to net tax pursuant to paragraph 232(3)(c) to the extent that the registrant claimed ITC in the same or an earlier period. Subsection 169(1) is separate and distinct from paragraph 232(3)(c).  Paragraph 232(3)(c) didn’t apply in respect of the notes because the ITCs relating to the deferral periods have to been claimed by the taxpayer in a return for the reporting period in which the notes were received or in an earlier period.

The Crown Argued that the taxpayer had to pay GST on the value of the consideration for supply under subsection 165(1), and that a price reduction by the supplier cannot be claimed as an ITC because that amount is no longer payable pursuant to 168(1) and 169 of the ETA.  The value of the GST payable doesn’t crystallize on the issuance of the Invoice by the supplier.

ANALYSIS

By operation of ETA subsections 152(1) and 168(1), tax in respect of a taxable supply is payable on the earlier of when the consideration is paid or becomes due, being the earlier of when the invoice was issued or ought reasonably have been issued, of when payment must be made. In this case, the earliest time was when the invoice was issued.  Thus, the court concluded, that following the wording of subsection 169(1), the ITC crystallized at the time the invoice was issued.  The Court didn’t agree with the crown that the ITC can be reduced by the GST credited or issued by a not, as except for section 232 there is no provision that requires the registrant to make adjustments to ITCs as a result of notes.

The Court stated that section 232, once invoked by the supplier, sets out what the supplier and customer must do. The supplier may deduct (paragraph 232(3)(b)) from its net tax the amount credited. But, paragraph 232(3)(c) the recipient must add the a mount of tax credited in determining its net tax, but ONLY if the recipient has claimed ITCs in respect of the credited tax in the same, or a preceding reporting period as one of the relevant notes were issued.  The court determined that section 232 didn’t apply in this case as the taxpayer did not claim ITCs in respect of the deferral periods in the same or a previous reporting period.  The Court made this determination on the basis of the principle of statutory interpretation put forth by the SCC in Canada Trustco Mortgage Co. v. Canada,[2005] 2 S.C.R. 601.

In dealing with the Crowns argument that the interpretation put forward by the taxpayer would give it a windfall the court referred to the decision in Dowbrands Canada Inc. v. Canada, [1997] G.S.T.C. 85, where the argument that the object and spirit of the act didn’t allow for a tax windfall:

24     The fact that the Appellant may not have intended to refund any portion of the GST originally paid by its customers when it made the rebate payments and subsequently claimed a windfall tax advantage is of no consequence to this appeal. I think it is appropriate to quote the SCC in Antosko v. Minister of National Revenue,

Where the words of the section are not ambiguous, it is not for this Court to find that the appellants should be disentitled to a deduction because they do not deserve a “windfall” … In the absence of a situation of ambiguity, such that the Court must look to the result of a transaction to assist in ascertaining the intent of Parliament, a normative assessment of the consequences of the application of a given provision is within the ambit of the legislature, not the courts.

[Footnotes omitted].

Since sections 232 was clear and unambiguous in when it required addition to net tax, there was no basis to state that the failure to net the GST was contrary to the spirit and intent of the act.

The court stated that the four-year period for the MNR to reassess ITCs doesn’t start to run until the deferred ITC were claimed.  As such, the MNR was not statute barred.

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