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
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