In Academy of Applied Pharmaceutical Sciences (2014 TCC 171) the taxpayer, the Academy of Applied Pharmaceutical Sciences, was a GST/HST registrant (para. 3). The taxpayer provided two different educational services. The first, which was GST/HST exempt, was a Diploma Programme on pharmaceutical science. The second service was the provision of workshops providing continuing education in the form of conferences on new trends in pharmaceutical sciences. This was subject to GST/HST (para. 4).
There were two audits for GST/HST purposes. At issue at both audits was the fact that (i) the Taxpayer failed to keep expenses related to the GST/HST registered business separate from the exempt business and (ii) sought to offset all GST/HST incurred from both arms of the business against GST/HST payable. In June 2008, the Taxpayer was audited for its 2007 taxation year. The auditor, in discussion with the Taxpayer and its bookkeeper, determined that, for the purpose of the audit, 50% of the expenses incurred would be a reasonable percentage to be allocated to the Workshop as allowable ITCs. (para. 7)
Although the Auditor, in her report, recommended that taxable income (meaning, for current purposes, subject to GST/HST) should be segregated from exempt income (meaning not subject to GST/HST), expenses should be segregated whether it related to earning taxable income, expenses related to earning exempt income or expenses related to earning mixed taxable and exempt income, this recommendation was not followed by the Taxpayer. According to the Taxpayer, the Auditor advised that on a go-forward basis the same 50% allocation could be used for the purpose of claiming ITCs.
A second audit was carried on in November of 2012. This time, a new auditor found that the 50% allocation was not reasonable for the periods under review and that 11% should have been allocated for 2010 and 14% for 2011. (para. 8). The taxpayer although not disputing the reasonableness of the new percentage brought the action on the basis that the Taxpayer had relied on the first Auditor’s verbal recommendation that a 50% allocation was a reasonable one and that the Taxpayer was now penalized for relaying on the expertise of an auditor from the CRA (paras. 11 and 12).
This case is an informal procedure case. This means that the case does not form a precedent. The case is intriguing in that the first auditor did not indicate the 50% allocation in writing. But, for current purposes, the case is interesting because the Court considers the verbal representation made by CRA and reviews the doctrines of both estoppel and officially induced error. The doctrine of estoppel generally stems from equity and provides that if: (i) a representation is made by a party or an agent of a party; (ii) another person relies on the representation and (iii) suffers detriment as a result of the reliance. The question is whether the first auditor made a representation on which the appellant taxpayer could rely. However it is a well-established principle that that estoppel cannot override the law of the land. In other words, a representation by anyone cannot make the law anything other than what the law is. A representation as to the content of the law this however does not mean as Justice Bowman stated in Goldstein 96 DTC 1029 and reproduced at paragraph 21 of the decision in Academy of Applied Pharmaceutical Sciences:
It is sometimes said that estoppel does not lie against the Crown. The statement is not accurate and seems to stem from a misapplication of the term estoppel. The principle of estoppel binds the Crown, as do other principles of law. Estoppel in pais, as it applies to the Crown, involves representations of fact made by officials of the Crown and relied on by the subject to his or her detriment. The doctrine has no application where a particular interpretation of a statute has been communicated to a subject by an official of the government, relied upon by that subject to his or her detriment and then withdrawn or changed by the government. In such a case a taxpayer sometimes seeks to invoke the doctrine of estoppel. It is inappropriate to do so not because such representations give rise to an estoppel that does not bind the Crown, but rather, because no estoppel can arise where such representations are not in accordance with the law. Although estoppel is now a principle of substantive law it had its origins in the law of evidence and as such relates to representations of fact. It has no role to play where questions of interpretation of the law are involved, because estoppels cannot override the law. (Emphasis mine).
The case of Academy of Applied Pharmaceutical Sciences is a case where the doctrine of estoppel clearly did not apply, as the idea of a static allocation of 50% was contrary to the Excise Tax Act, RSC 1985, c. E-15, and the auditor had stated in writing that the expenses were to be tracked. It was therefore possible to view the statement of the auditor as a second chance to track the expenses so that a more precise allocation would be possible, and not penalize the taxpayer for the period under review, but take the opportunity to improve their documentation practices. Rather than taking this opportunity, the taxpayer thought that the allocation was now set up for them by the auditor.
The doctrine of officially induced error in essence holds that the Appellant was induced into a course of conduct that was to its detriment as a result of erroneous advice given by the first auditor to the Appellant. The Court held that this should generally not be available in tax appeals.
The authors agree that the facts presented here do not validly allow for either estoppel or officially induced error. This is due at least in part to the fact that the audits at issue were quite clearly each confined to the period covered by the audit, and not a guarantee of future treatment. Furthermore, the taxpayer can be taken to have “cherry-picked” the statements of the first auditor (taking the reasonableness of the division, but ignoring the rest of the advice from the auditor. However, the broader questions of the availability of these potential defences in other circumstances may be unwise. After all it is usually better to wait and see whether different facts ought to lead to different results. But, other than a concern about the future and different facts, it is clear to the authors that the case is rightly decided.
Sunita D. Doobay
TaxChambers LLP, Toronto
Darcy L. MacPherson
Faculty of Law, University of Manitoba, Winnipeg