Date: 19990226
Docket: 97-2620-GST-I
BETWEEN:
MIDLAND HUTTERIAN BRETHREN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
ISSUE:
[1] The issue is twofold:
1. Whether the Appellant, in respect of the period from July 1, 1992 through March 31, 1995, is entitled to an input tax credit under paragraph 169(1)(c) of the Excise Tax Act, Part IX ("Act"); and
2. Whether the Appellant is subject to a penalty under subsection 280(1) of the Act.
GENERAL:
[2] All section numbers refer to provisions of the Act.
FACTS:
[3] The Appellant is a communal colony governed by the Constitution of the Hutterian Brethren Church and Rules as to Community of Property. Pursuant to these rules, members are required to devote all their time, labour, services, earnings and energies to the colony without compensation or reward. The members of the colony shall be entitled to have their husbands, wives and children, who are not members thereof, reside with them and be supported, maintained, instructed and educated by the colony. Accordingly, the Appellant provides all necessities to its members and their families including clothing, housing, education and food.
[4] The Appellant conducts a farming operation. It purchases, inter alia, two types of cloth. One, which is heavy and durable, is made into work clothes and the other, a lighter and finer fabric, is made into church clothes. The clothes are made by and for members. The men use the heavier clothes in their farm work.
[5] The Appellant has claimed input tax credit in respect of fifty percent of the Goods and Services Tax ("GST") paid on the purchase of "dry goods" on the basis that within the meaning of paragraph 169(1)(c) the cloth was
(a) .. acquired ... for consumption, use or supply in the course of commercial activities ..
ANALYSIS AND CONCLUSION:
[6] The pertinent portions of paragraph 169(1)(c) read as follows:
... where property ... is supplied ... by a person and ... tax in respect of the supply ... becomes payable ... the input tax credit is the amount determined by the formula
A x B
where A is the ... tax in respect of the supply and B is ... the extent (expressed as a percentage) to which the person acquired ... the property ... for consumption, use or supply in the course of commercial activities of the person.
(emphasis added)
[7] The term "commercial activity" is defined in subsection 123(1) to mean:
... a business carried on ... except to the extent to which the business involves the making of exempt supplies...
[8] It is agreed that exempt supplies are not made in this case. There is no dispute about the Appellant carrying on commercial activity.
[9] I have concluded that the cloth was not acquired in the course of the Appellant's commercial activities. In Attorney General of Canada v. Attorney General for Alberta, [1992] G.S.T.C. 2 (S.C.C.) at page 2-6, Lamer, C.J. said:
The GST is designed to be a tax on consumption. To this end, the GST Act contemplated three classes of goods and services. Taxable supplies attract the tax of 7% each time they are sold. To the extent that the purchaser of a taxable supply uses that good or service in the production of other taxable supplies, it is entitled to an "input tax credit" and can recover the tax it has paid from the government.
[10] The cloth purchased and subject to GST was used by the Appellant to make clothing for members of the colony to wear while working at their farm duties. The cloth was not used in the production of taxable supplies. The commercial activities of the Appellant were its farming operations. Those activities did not involve making clothes which were simply worn by members while engaged in commercial activities.
[11] With respect to the second issue, I have concluded that the penalty imposed under subsection 280(1) of the Act was improperly so imposed. That section reads as follows:
Subject to this section and section 281, where a person fails to remit or pay an amount to the Receiver General when required under this Part, the person shall pay on the amount not remitted or paid
(a) a penalty of 6% per year, and
(b) interest at the prescribed rate,
computed for the period beginning on the first day following the day on or before which the amount was required to be remitted or paid and ending on the day the amount is remitted or paid.
[12] In Pillar Oilfield Projects Ltd. v. The Queen, [1993] 2 G.S.T.C. 1005 (T.C.C.) Bowman, J. held that it would be contrary to the principles of "fundamental justice" and "fairness" to withhold the right to plead due diligence with regard to penalties imposed under s. 280 of the Excise Tax Act. That decision has been assailed continuously by the Respondent. The overdue and non-lamented demise of the Respondent's position was occasioned and presided over by the Federal Court of Appeal in Consolidated Canadian Contractors Inc. v. Canada, [1998] G.S.T.C. 91 (F.C.A.). Here, the Court said that it had been asked to determine whether a "due diligence" defence was available to persons otherwise subject to an automatic penalty for failing to remit the correct amount of GST as required under the Excise Tax Act. Robertson, J. said at 91-5:
What the Minister challenges is the "jurisdiction" of the Tax Court to relieve registrants of penalties imposed under s. 280 of the Excise Tax Act on the basis of an implied due diligence defence.
[13] The Minister cited the decision of the Supreme Court of Canada decision in R. v. Sault Ste. Marie, [1978] 2 S.C.R. 1299 as authority for the proposition that it cannot. The learned Justice then said:
That case involved the application of the due diligence defence in the context of a regulatory offence.
In the present appeal, we are dealing with an "administrative penalty".
[14] He said further that it is open to the Court to determine whether the defence of due diligence may be raised in the context of administrative penalties. After lengthy discussion, the Court concluded that the presumption in favour of strict liability had not been rebutted by the Minister and that the Minister's appeal should accordingly, be dismissed. At 91-17 Robertson, J. posed the question as to whether if the Minister possesses the statutory right to waive penalties, there is any room for the Tax Court to grant relief through an implied due diligence defence. His response was:
I note that by reading in a due diligence defence, the Tax Court is not actually waiving the 6% penalty. Rather, it is granting registrants the opportunity to exculpate themselves by demonstrating that they exercised reasonable care in attempting to ascertain the correct amount of GST owing. If registrants fail to meet the required standard of care, they remain liable to pay the penalty. The Minister, on the other hand, is entitled to waive a penalty even if due diligence has not been established. Thus, there are substantive differences between an implied due diligence defence and the Minister's statutory right to waive penalties.
[15] I agree with Appellant's counsel that the Appellant met the test of due diligence in acting upon the advice of its chartered accountant in claiming input tax credits. The evidence indicated that this matter was discussed with officials of Revenue Canada in advance of the input tax credit claim being made and that it did not agree that such claim would be correct. However, the Appellant, on the advice of its Chartered Accountant, made the input tax credit claim. The claim was not specious. It was based upon a credible legal argument respecting the interpretation of the Act. In these circumstances, in spite of the fact that that argument was not successful, I do not find the imposition of penalty appropriate.
[16] Accordingly, the appeal is dismissed as to the first issue and is allowed as to the second issue.
Signed at Ottawa, Canada this 26th day of February, 1999.
"R.D. Bell"
J.T.C.C.