By way of background, Canadian exports are treated as zero-rated supplies under Part V of Schedule VI to the Excise Tax Act (Canada)– provided certain requirements are met. One of the broadest exemptions is found in Section 1 of Part V of Schedule VI, which zero-rates exports where, among other things:
- the supplier supplies property to a recipient who intends to export the property,
- after the supply is made, the property is not further processed, altered, or transformed and
- the supplier maintains “evidence satisfactory to the Minister” of the export of the property by the recipient.
In Nwaukoni v The Queen (2018 TCC 252), the Tax Court of Canada considered the meaning of “evidence satisfactory to the Minister”. It determined that except in very limited circumstances, the TCC cannot overrule the Minister when it comes to this point – a potentially alarming decision.
On the facts of the case, Mr. Nwaukoni bought damaged and/or high mileage vehicles and then resold them to either Canadian or international customers. He claimed that upwards of 70% to 80% of sales were export sales and were, therefore, zero-rated sales on which he did not have to charge GST/HST. Typically, Mr. Nwaukoni or his agents would buy a vehicle at an auction before transporting it back to his place of business until a buyer could be found. If the buyer was from outside of Canada, the vehicle was loaded into a marine container and shipped overseas. During this time, Mr. Nwaukoni would then obtain a Loading Declaration Form and Bill of Lading (one BOL for each container of vehicles) from the shipper to confirm the transaction. Mr. Nwaukoni then filed his GST/HST returns claiming input tax credits on the expenses associated with obtaining the vehicles, claiming that most of his sales were zero-rated.
On audit, the Canada Revenue Agency took a different view of the situations, assuming that only 6% of the vehicles sold were actually exported on a zero-rated basis. A review of September 2011 sales, for example, found that only two of the vehicles sold had VINs matching to the bills of lading provided by Mr. Nwaukoni. The CRA applied the 6% figure to the whole two-year audit period and reassessed Mr. Nwaukoni for tax not collected.
On appeal, the TCC was tasked with determining which of the vehicles were, in fact, exported, and whether these transactions could be properly zero-rated.
The TCC reviewed Part V of Schedule VI to the ETA and determined that Mr. Nwaukoni’s exports of tangible personal property could be potentially zero-rated under either section 1 or section 12 – if they met the conditions in those provisions.
In the Court’s view, section 1 did not apply because supplies were only zero-rated if the supplier maintained “evidence satisfactory to the Minister of the exportation of the property by the recipient”. With respect to section 12, the Court’s view was that supplies of tangible personal property were only zero-rated if the supplier exports the goods themselves, subject to certain conditions.
On the section 1 point, the Court drew on B.E.S.T. Linen Supply and Services Ltd v The Queen (2007 TCC 468) and Style Auto GJ v The Queen (2007 TCC 597) to conclude that the Minister is the only person who can decide whether the evidence of the export is ‘satisfactory’. The TCC ruled that it could not overrule the Minister except in very specific circumstances, even if the TCC, in contrast to the Minister, were to find the evidence provided to be ‘satisfactory’.
The court ruled that this near-absolute discretion is tempered only when a supplier can demonstrate that the Minister considered extraneous factors, failed to consider relevant factors, violated a legal principle, or acted in bad faith. On this, the TCC found that Mr. Nwaukoni failed to provide any evidence that would warrant overturning the Minister’s decision, which meant he could not avail himself of section 1.
On the section 12 point, the TCC again concluded that Mr. Nwaukoni had failed to substantiate the fact of the export. His documents were riddled with errors. His BOLs were often just riders rather than the BOLs themselves. Those that were actual BOLs were either not stamped, not dated, or not complete. The LDFs were also deficient. They listed neither Mr. Nwaukoni nor the business name he was carrying on under as the exporter. Several bills of sale for allegedly exported vehicles, entered into evidence at the hearing by Mr. Nwaukoni, were for vehicles later registered in Ontario. Only a small number of the documents substantiated a true export sale. In oral testimony, Mr. Nwaukoni admitted that he forged signatures on his B13 forms and Nigerian Customs Declarations in advance of the hearing. The TCC did not find him credible and concluded that Mr. Nwaukoni failed to meet the burden of proof.
(Note that section 12 has no “evidence satisfactory to the Minister” requirement, which means that the application of the section falls to be determined by the fact of the export, which is a decision open to the TCC to make on a balance of probabilities).
In the end, the TCC allowed the appeal, but only to the extent that the Respondent conceded that 13% of the sales were export sales. The Respondent also received costs.
Commentary
Mr. Nwaukoni’s case is perhaps the classic example of the maxim that hard facts make bad law. It is not difficult to see why the TCC found in the CRA’s favour, but it is also not difficult to see the problems that the court’s decision may pose for suppliers trying to rely, in the future, on section 1 of Part V of Schedule VI.
From a purely technical perspective, section 1 should not have been part of the court’s analysis since on Mr. Nwaukoni’s version of the facts, he (as supplier) was the one exporting the vehicles (not his buyers, as recipients). This appears to make everything the TCC said about the “satisfactory evidence” point obiter dicta (not binding of future decisions). This is perhaps fortunate, since what the court said about the standard of review was, in our view, incorrect, and based on judicial decisions rendered before the Supreme Court of Canada’s landmark decision in Dunsmuir v New Brunswick (2008 SCC 9), which establishes Canada’s current framework for reviewing discretionary decisions. The test is that the CRA’s decision would need to be “reasonable” – which is probably a fairly good standard here: not too low, and not too high. While some of the factors cited by the TCC in its decision (considered extraneous evidence, etc.) might fit into a “reasonableness” analysis, the TCC makes no reference to “reasonableness” at all (perhaps a hole in the Crown Counsel submissions in this self-represented matter).
Fortunately, the case was lost on its facts, and the overall decision reached by the TCC is correct.
The takeaway point for future cases is, perhaps, that the supplier wishing to rely section 1 for the zero-rating of TPP that is ultimately exported by a recipient will not have to face an insurmountable cliff of ministerial discretion. The CRA must make decisions that are reasonable.
That the TCC felt itself capable of this level of review on an appeal under the ETA is also somewhat reassuring, as it potentially disposes of the counter-argument that only applications for Judicial Review in the Federal Court of Canada can review the CRA’s discretional decisions in this context (then again, everything on section 1 was obiter).
John G. Bassindale is a Partner and Robert G. Kreklewetz is a Founding Partner at Millar Kreklewetz LLP in Toronto.