COURT OF APPEAL FOR ONTARIO DATE: 20220427 DOCKET: C68769

van Rensburg and Roberts JJ.A. and Tzimas J. (ad hoc)

BETWEEN

Enterprise Rent-A-Car Canada Company

Appellant (Appellant)

and

The Minister of Finance

Respondent (Respondent)

Counsel: Matthew G. Williams and E. Rebecca Potter, for the appellant Lori Patyk and Daniel Irvine, for the respondent

Heard: November 23, 2021

On appeal from the judgment of Justice Frederick L. Myers of the Superior Court of Justice dated September 8, 2020, with reasons reported at 2020 ONSC 5339.

REASONS FOR DECISION

Overview

[1] This appeal involves the single and narrow factual question of which taxes the taxpayer collected during the audit period in issue. Specifically, were the applicable taxes owing on insurance products sold to customers “tax collected” as Retail Sales Tax (“RST”) for the purpose of their assessment by the provincial tax authority, the respondent Minister of Finance (“the Minister”), under s. 18 of the Retail Sales Tax Act, R.S.O. 1990, c. R.31 (“RSTA”)? Or were they collected as harmonized sales tax (“HST”) under the Excise Tax Act, R.S.C. 1985, c. E-15 (“ETA”)?

[2] The appellant, Enterprise Rent-A-Car Canada Company (“Enterprise”), appeals the dismissal of its appeal [1] from four Ontario retail sales tax assessments by the Minister. It argues that it charged, collected, and remitted to the Canada Revenue Agency (“CRA”), the taxes exigible on its insurance products as HST, and not as RST. It says the motion judge erred in focusing on Enterprise’s belief about the taxes it was collecting rather than on the factual question of which taxes Enterprise was actually collecting.

[3] We agree that the motion judge erred by focusing on the wrong question. We therefore allow the appeal.

Factual Summary

[4] During the audit period from August 1, 2011 to July 31, 2015 (“the audit period”), Enterprise operated as a car and truck rental company with retail locations across Canada. As part of its business, it offered insurance coverage on the motor vehicles rented by its customers. The four assessments in issue covered thousands of sales transactions involving three types of insurance products that Enterprise sold to its customers each year during the audit period.

[5] During the audit period, under its GST/HST number, Enterprise remitted to the CRA as HST the taxes charged and collected on the insurance products sold to its customers. Its invoices to its customers bore its GST/HST number [2] and set out the amount charged as HST.

[6] Enterprise has submitted that the description of the taxes charged and collected as HST on its invoices for the audit period represented a deliberate change that Enterprise made to its invoicing practices. This change resulted from and was effective as of the July 1, 2010 harmonization between the federal and Ontario sales tax regimes. Prior to harmonization, Enterprise was charging, collecting, and remitting to the Minister the former provincial sales tax (“PST”) at 8% on its sales of insurance products. Following harmonization, Enterprise changed its accounting and invoicing practices to charge, collect, and remit HST to the CRA on the sales of its insurance products.

[7] According to Enterprise, Enterprise’s decision to charge, collect, and remit HST arose from a determination by Enterprise’s tax team, which was comprised of Enterprise’s four controllers as well as Kent Chancellor, Vice President, Business Management, Canadian Operations for Enterprise (who had responsibility for sales tax administration for all of Canada). The team determined that the only relevant sales tax to be collected following harmonization was the federal HST, and not RST. As a result, they concluded that Enterprise was legally obligated to charge HST in respect of the insurance products sold to customers, and to remit that amount to the CRA. Enterprise therefore changed its invoicing practices and adjusted its internal accounting to ensure that HST of 8% on two of the insurance products and 13% on the other was charged, collected, and remitted to the CRA through Enterprise’s registered HST account. Enterprise did not register itself with the Minister for RST purposes at any time during the audit period up through to June 2015.

[8] According to Mr. Chancellor’s unchallenged evidence, during the five years subsequent to harmonization, Enterprise had received no feedback from any consumers, customers, or the Minister that Enterprise was incorrect in its invoicing and remittance practices. It was not until 2015 that the Minister communicated to Enterprise that it should have collected the tax on the insurance products as RST and remitted it to the Minister as RST, and not to the CRA as HST.

[9] Specifically, on May 28, 2015, Krishna Ramlal, Senior Tax Auditor, Insurance Premium Tax, for the Ministry of Finance (“the Ministry”), wrote an email to advise Mr. Chancellor that he was unable to find an active retail sale insurance premium tax account for Enterprise after June 30, 2010. Mr. Ramlal wrote that “Your company has been collecting RST on behalf of insurers and you were obligated to remit it to the Ministry.… let me know whether the taxes were filed with CRA in error (as has happened in many instances) and action can be taken to remedy the situation.”

[10] In his email response dated May 29, 2015, Mr. Chancellor stated: “I believe we have in fact been remitting the ORST (Premium Tax) in our HST (CRA) returns. You mention below there is a remedy, can you advise.”

[11] On May 29, 2015, Mr. Ramlal advised the steps to “remedy this situation” were to register an RST account; an audit would be done to confirm the taxes collected from July 1, 2010; evidence would be required to confirm that the taxes were paid to the CRA in error; and Enterprise would have to request a refund from the CRA of its payments to the CRA made in error.

[12] Mr. Chancellor’s evidence in his affidavit and on his cross-examination was that during the audit period, he believed that HST was being collected and remitted to the CRA. However, when confronted by Mr. Ramlal, his thought was although HST was on Enterprise’s invoices, perhaps the tax team got it wrong when they initially did their review back in 2010, and if that was the case and there was a remedy available, that they could resolve the issue rather quickly.

[13] The Minister carried out four assessments and determined the amount owing as RST to be $1,477,947.45 plus interest of $438,408.82. The Minister exercised its discretion not to apply a further 25% penalty under the RSTA for tax collected but not remitted. Enterprise filed a notice of objection dated April 20, 2018 with respect to each of the assessments.

[14] The objection review process followed in which Elizabeth Pope, an Appeals Officer in the Advisory, Objections, Appeal and Services Branch of the Ministry, conducted an independent review of the facts of the case, the evidence that was provided in support of the notice of objection, and the relevant legislation to determine if the notice of assessment was issued in accordance with the legislation. Enterprise’s counsel made written submissions and participated in discussions by telephone and letter with Ms. Pope.

[15] In her July 12, 2018 letter to Enterprise’s counsel, Ms. Pope advised of her conclusion that “Enterprise collected amounts on account of retail sales tax.” She based her conclusion primarily on two factors: Mr. Chancellor “confirmed that Enterprise was collecting Ontario retail sales tax on insurance premiums and that such tax was being remitted to the CRA with its HST” (emphasis added); and 8% was charged as HST on the premiums for various insurance products that were sold to customers, which was distinct from the 13% HST charged on other amounts. Ms. Pope repeated in a telephone call with Enterprise’s counsel, as memorialized in her file note, that the two bases for her decision were: Mr. Chancellor’s statements that RST was being collected as HST and the mislabelling of the RST as HST given that the tax rate of 8% was the same. She invited Enterprise to provide additional information and submissions, which Enterprise did by asking for further clarification on the July 12 letter.

[16] By letter dated September 27, 2018, Ms. Pope advised Enterprise that her earlier conclusion had not changed, for the same reasons previously expressed:

Mr. Chancellor stated that he believed that Enterprise was in fact remitting Ontario retail sales tax on insurance premiums in its HST returns to the Canada Revenue Agency (CRA).

During the following six months, Mr. Chancellor did not advise that his initial belief was incorrect. Rather, he provided the ministry auditor with business records to substantiate the quantum of the Ontario retail sales tax that was collected and remitted to the CRA. In view of the senior position that Mr. Chancellor held with Enterprise and his involvement in providing the detailed business records to the ministry, there was no reason to question his statements.

The fact that two taxes were identified on the invoices at different rates, i.e., 13% and 8%, indicates to me that a tax other than HST was being charged and collected. Since insurance premiums were subject to retail sales tax at 8% prior to harmonization in 2010 and continued to be subject to retail sales tax at the rate of 8% after HST was implemented, it is my opinion that the tax at 8% related to Ontario retail sales tax, albeit it was named incorrectly on the invoices. [Emphasis added.]

[17] Ms. Pope presented her report to the senior management of the Ministry for the final decision on the objection. The Minister informed Enterprise by letter dated October 23, 2018 that it found no reason to vary the assessments.

Appeal of Assessments

[18] Enterprise appealed the four assessments to the Superior Court. Enterprise sought to obtain summary judgment on the primary basis that HST was in fact collected and that RST was not collected.

[19] The Minister took the position before the motion judge that during the audit period Enterprise collected RST on insurance premiums but remitted it to the CRA in error and that Enterprise had mislabeled the tax as HST on all its invoices, which led to non-compliance with the RSTA.

Motion Judge’s Decision

[20] The motion judge determined that Enterprise had erroneously remitted what was in fact RST to the CRA as HST. He based his conclusion primarily on the email exchange, referenced above, between Mr. Chancellor and Mr. Ramlal, which the motion judge characterized as an admission that Enterprise was charging, collecting, and remitting RST during the audit period. He found the admission was confirmed by Mr. Chancellor on his cross-examination.

[21] The motion judge rejected that Enterprise’s invoices supported its position that HST was being charged and collected. Rather, he found that Enterprise’s invoices became quite ambiguous when viewed with Mr. Chancellor’s admission in mind. According to the motion judge, it was not clear whether the change to the invoices in 2010 because of harmonization occurred because Enterprise decided to collect the second component of HST or because it thought that it was still collecting RST but just remitting it to the CRA in the HST environment.

[22] The motion judge dismissed Enterprise’s appeal and upheld the assessments, awarding, on consent, costs to the Minister in the amount of $33,532.62.

Issues

[23] Enterprise submits that the motion judge erred in law by answering the wrong question. According to Enterprise, the analysis undertaken by the motion judge did not answer the question of which tax Enterprise in fact collected during the audit period but, instead, the question of which tax Enterprise thought it was collecting during the audit period. The evidence demonstrated that Enterprise in fact collected HST, not RST.

[24] The Minister submits that the motion judge did answer the correct question and came to the correct result. As the motion judge correctly found, Enterprise was in fact collecting RST on its sales of insurance products but remitting it to the CRA in error because it had mislabeled the tax as HST. Although the tax on the insurance products may have been wrongly labelled as HST, the tax itself represents RST since it was taxed on Enterprise’s invoices at the RST rate, namely 8%, and not at the HST rate of 13%.

[25] As we shall explain, the question of whether the motion judge answered the wrong question is dispositive of the appeal. It is therefore not necessary to address Enterprise’s other grounds of appeal.

Standard of Review

[26] The standard of review is not controversial. It is undisputed that the question of whether the motion judge answered the wrong question is a question of law and therefore is reviewable on a standard of correctness: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at para. 8; Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336, at para. 24.

Analysis

(i) Did the motion judge answer the wrong question?

[27] Although the contested issue appears simple in its articulation, it took some distillation by the motion judge, in preliminary discussions with counsel, to wrestle it down to its present form. The motion judge explained the process as follows:

It seemed to me initially that to determine whether Enterprise collected RST or HST, it might be relevant to conduct a legal analysis to determine which tax it properly ought to have been collecting during the audit period. But both parties strongly dissuaded me from doing so. They argue that the provincial statute in many sections differentiates a tax being “collectible” from the tax actually “collected”. The statute also contemplates the wrong tax being collected in error. This leads the parties to agree that regardless of which tax was legally due or “collectible,” the question of fact as to which tax was actually “collected” is a different question.

[28] The motion judge stated that he was not “determining which tax actually applied as a matter of law as part of the factual analysis in this case.” He stated that his “task, therefore, is to determine, whether Enterprise collected RST as found in the assessments” and that “the question for determination is whether during the audit period, Enterprise was collecting the federal 8% component of the HST in Ontario or was it collecting RST and remitting it to the CRA as if it was HST?”

[29] While initially and correctly stating the question to be determined, the motion judge unfortunately did not answer it. Rather, the motion judge focused on what Enterprise believed it was collecting. As the motion judge stated: “The evidence of which tax Enterprise in fact collected can only come from Enterprise” and, in particular, from the evidence of Mr. Chancellor as to Enterprise’s belief about which tax it had collected.

[30] The motion judge summarized his conclusion on the question of Enterprise’s belief and the importance of Mr. Chancellor’s “admission” of that belief as follows:

As I will set out below in greater detail, Enterprise says it believed it had to charge HST at 8% on sales of insurance and it did not charge RST. I find that it is more probable that during the audit period it charged RST just as it had charged PST before. Enterprise’s mistake was that it remitted the RST collected to the CRA instead of remitting it to the Minister. It did not charge the wrong tax. It charged the correct tax, but it was confused as to how harmonization was supposed to work and it remitted the RST it collected to the wrong tax collector.

I make this finding principally because Mr. Chancellor admitted that this was what was happening in a contemporaneous exchange with a provincial tax auditor and again while under cross-examination.

[31] The motion judge’s assessment of Mr. Chancellor’s evidence, and especially his credibility, encompassed the bulk of his analysis. He rejected what he viewed as Mr. Chancellor’s attempts to resile from what he characterized as his admission to Mr. Ramlal that he believed that Enterprise was remitting the exigible RST in its HST returns during the audit period. The significance of Mr. Chancellor’s statement to the motion judge’s analysis is underscored in his findings that Mr. Chancellor “essentially confessed” and “[w]hen left to his own voice, Mr. Chancellor says in his 2015 email that Enterprise was remitting RST to the CRA as HST.” Mr. Chancellor’s statement to Mr. Ramlal led to the motion judge’s conclusion that “[t]he statements and actions of the company are not consistent with it having a studied belief that it was collecting HST.”

[32] In our view, by focusing on Enterprise’s belief through Mr. Chancellor’s evidence, the motion judge answered the wrong question and fell into error. In the circumstances of this case, Enterprise’s belief (through Mr. Chancellor) was not dispositive of the analysis about which tax Enterprise was in fact collecting. This was not a case where the taxpayer deliberately charged, collected, and remitted the wrong tax to the wrong government ministry. Rather, Enterprise’s collection and remittance of HST to the CRA, instead of RST to the Ministry, was a product of error or confusion as to which tax should be collected.

[33] The motion judge did not have the benefit of the clear articulation of the issue that the parties presented before this court. To be fair to the motion judge, it is understandable how the question shifted before him. In our view, the shift in the motion judge’s analysis can be directly attributed to the parties’ imprecise articulation of the issue to be determined and their submissions. As the motion judge stated: “The parties also agree that the question of whether a particular tax was collected is a question of fact. It requires a determination of what Enterprise intended to do and actually did” (emphasis added). The parties’ reference to Enterprise’s intention created confusion because “intention” was understood in the sense of what Enterprise believed it was doing when it rather should have been understood in the sense of what Enterprise did.

[34] Moreover, the confusion about the question to be determined was further exacerbated by the Minister’s submissions, repeated here, that the tax itself represents RST since it was taxed on Enterprise’s invoices at the RST rate, namely 8%, and not at the HST rate of 13%. This argument again shifts the analysis away from which tax Enterprise was in fact collecting to the legal analysis of which tax it should have been collecting and which tax was legally exigible on the insurance products in issue. However, this was not the question. The question of whether RST should have been collected because it is legally exigible on the sale of the insurance products in issue would require an interpretation of tax law. As earlier noted, the parties agreed and the motion judge acknowledged that this legal question was not part of the question to be determined.

[35] As a result, we set aside the motion judge’s decision and determine the issue afresh.

(ii) Which tax did Enterprise in fact collect?

[36] As we shall explain, we conclude that Enterprise in fact collected HST and not RST during the audit period.

[37] The evidence of the actions that Enterprise in fact carried out is uncontroverted. As a result of the tax harmonization in July 2010, Enterprise’s internal tax team determined that HST and not RST was payable on the three insurance products in issue: 8% on two of them and 13% on the third. As a result, Enterprise changed its invoicing practices and internal controls to charge, collect, and remit HST on those insurance products. As of the effective date of harmonization, Enterprise closed its provincial tax accounts and updated its invoices to no longer show PST but instead showed HST, along with its GST/HST number. It did not register or open an RST account with the Ministry. There is no question that Enterprise duly remitted all the taxes collected to the CRA as HST during the audit period. The amounts so charged and collected by Enterprise were reported and remitted to the CRA in Enterprise’s HST returns under Enterprise’s GST/HST number.

[38] Enterprise unfailingly followed these practices through thousands of transactions from 2010 through 2015. Enterprise’s practices are consistent with CRA policy in its GST/HST Policy Statement P-131R that: “Generally, a person will be considered to have collected an amount as or on account of tax where the person issues an invoice for the supply to the customer indicating the amount of GST/HST payable and subsequently collects the amount.”

[39] There is also no question that as a result of the assessments, Enterprise changed its practices and is now collecting and remitting RST to the Ministry on the insurance products in issue. However, as the parties agreed, whether Enterprise erred in previously collecting HST and not RST, and the fact that Enterprise changed its invoicing practices to collect and remit RST, is of no relevance on this appeal. [3]

[40] There is no evidentiary foundation for the conclusion that Enterprise was collecting RST as HST during the audit period. The fact that Enterprise’s financial officer may have later become concerned towards the end of the audit about the possibility of a mistake, especially after having been confronted by the Minister’s representative, is not determinative of the question. It is unfortunate that the Ministry’s misconception of the exchange between Mr. Chancellor and Mr. Ramlal that arose in Ms. Pope’s conclusions, as noted above, continues into this appeal. The question to be determined is what Enterprise was in fact doing during the audit period. The evidence clearly establishes that during the audit period Enterprise was charging, collecting, and remitting HST to the CRA.

[41] When the question of what Enterprise was in fact doing is applied, this is the only reasonable view of the uncontroverted evidence. It makes absolutely no sense that Enterprise would knowingly charge, collect, and remit RST to the CRA. Rather, it would have complied with its obligations under the RSTA and its regulations to charge, collect, and remit RST to the Ministry.

[42] Mr. Chancellor’s unchallenged evidence as elicited in his affidavit and on his cross-examination was that he took the lead to ensure compliance with respect to Enterprise’s Canadian sales tax analyses, collection, filings, and administration and that throughout the audit period, he considered it to be extremely important that Enterprise met all tax collection, reporting, and remittance obligations to which it was subject under Canadian federal and provincial laws. From this evidence, it is fair to draw the reasonable inference that if Mr. Chancellor had thought the taxes Enterprise was collecting were RST, they would have been remitted to the Minister. Indeed, this was the practice that Enterprise followed in the past when it was collecting and remitting PST. It changed its practice because it believed, erroneously as the parties agree, that HST and not RST was exigible on the insurance products on which it charged and collected the taxes that it remitted to the CRA. Importantly, Enterprise had nothing to gain by remitting RST to the CRA. On the contrary, as the Minister’s assessments demonstrate, it became subject to a significant liability by doing so.

[43] We are not persuaded by the Minister’s submissions that somehow the 8% HST noted on Enterprise’s invoices is evidence that the tax charged was RST because it is an equivalent rate. If anything, it is no more than coincidental that the rates match. The motion judge clearly understood that HST and RST are distinct, as he noted:

It is a common misconception to think that under harmonization, the Federal Government collects provincial sales taxes on behalf of the various provinces. Legally, that is not the case. In fact, federal HST is made up of two components. There is 5% tax levied on all applicable sales of goods and services. This replaced the GST that was set at 7% prior to harmonization. The second component of HST is a further amount that differs by province. In Ontario, the rate is 8% which equals the rate of Provincial Sales Tax (PST) that used to be charged by Ontario prior to harmonization.

PST (and its replacement RST) are not charged or collected as HST. [Emphasis added.]

[44] We do not accept the Minister’s submission that Enterprise should simply have requested a refund from the CRA and that it unreasonably delayed in doing so. First, a refund is not automatic. There is no way of knowing whether the CRA would have granted it. Indeed, the CRA may very well have taken the position that the taxes remitted were HST. In fact, the file notes of the Minister’s affiant suggest that the CRA may not have agreed to refund the amounts to Enterprise. The affiant wrote in his notes that “the CRA may view the misdirected amounts as HST collected in error, and not RST” and “[i]f so, the CRA may not refund amounts collected in error to the supplier/vendor, but rather to the clients of Enterprise ….”: Andrew Kovarcsik, “RST IP Enterprise Issue – Notes” (October 13, 2017), Minister’s Compendium, at p. 202 (emphasis added).

[45] The parties agree that the only basis for the Minister’s assessments in this case is under s. 18 of the RSTA, which permits assessments of the “tax collected”. The “tax collected” by Enterprise was not RST but HST. The Minister therefore had no basis to assess the “tax collected” by Enterprise.

Disposition

[46] Accordingly, we allow the appeal and set aside the motion judge’s order and the Minister’s assessments.

[47] The parties have agreed that Enterprise, as the successful party, is entitled to its costs in the amount of $5,000, inclusive of disbursements and applicable taxes.

[48] If the parties are unable to agree on the disposition of costs before the motion judge, they may make brief written submissions to this panel of no more than two pages, plus a costs outline, within seven days of the release of these reasons.

“K. van Rensburg J.A.”

“L.B. Roberts J.A.”

“E. Ria Tzimas, J. (ad hoc)”

Footnotes

[1] On consent, the four appeal files were consolidated into one appeal before the motion judge and will be referenced as one appeal here.

[2] Enterprise used its existing GST number on its invoices for HST because, as we understand it, the account was the same. Nothing turns on this difference in nomenclature and we will refer to it as Enterprise’s “GST/HST number”.

[3] The parties have made it very clear that this is a factual question. It is not a legal question requiring the determination of which tax should have been collected. Accordingly, while the parties have taken the joint position that RST and not HST should have been collected during the audit period, we should not be taken as agreeing with or making any determination about which tax should have been collected.