A recent case highlights the fact that at law, an agency agreement can be implied to exist based on the conduct of the parties alone – without any explicit written or verbal references to “agency”.  This is often referred to as an “Implied Agency”.

The case of Lohas Farm Inc. v. the Queen (2019 TCC 197) cites a number of past cases and textbooks for the concept of implied agency, and serves as a useful resource for taxpayers and counsel making similar arguments.

On the facts, Lohas Farm Inc. (“Lohas”) was primarily a blueberry farm whose director and sole shareholder, Mr. Liu, had previously worked in the Information Technology sector.  Mr. Liu’s former client suggested Lohas purchase new model iPhones in Canada, and export them to Hong Kong where they had not yet been released.

Mr. Liu recruited friends and acquaintances to purchase the iPhones for Lohas, in part because Apple limited purchases to 2 iPhones per person per day, and Lohas needed a large number of iPhones in a short period of time to take advantage of the release date gap. 

Mr. Liu promised to reimburse the purchasers for the iPhones, and pay them a commission.  He instructed purchasers to keep their receipts to confirm the serial number/IMEI, and advised them when to start and stop buying iPhones.  Mr. Liu met the purchasers regularly to collect the iPhones and receipts, paying the purchasers primarily via bank draft at an HSBC or TD Bank location.  Mr. Liu kept meticulous reports of the transactions and the identities of the purchasers Lohas paid for the iPhones. 

Lohas filed its GST/HST returns claiming ITCs for the amount of GST/HST paid on the iPhones.  The CRA denied Lohas the ITCs on the assumption that the iPhones had been purchased and then resold to Lohas, and not purchased on behalf of Lohas by the purchasers acting as agents. 

At the Tax Court, Justice D’Auray began her analysis on the concept of agency by quoting from Fridman’s Canadian Agency Law: “As with other contracts, the agency relationship may be impliedly created by the conduct of the parties, without anything having been expressly agreed as to terms ... [t]his may be so even if the principal did not know the true state of affairs.” 

Justice D’Auray then reviewed the case of GEM Health Care Group Ltd. (2017 TCC 13) on the test for implied agency, and referenced CRA Policy Statement P-182R which states that “case law supports that two parties may be engaged in an agency relationship without even being aware of it, provided their actions indicate that one party is acting as agent on behalf of another.”

On the basis of the facts before the Tax Court, Justice D’Auray found that the conduct of the parties demonstrated that:

1. 1. Both the principal and agent consented to the agency relationship and it could not be said the purchasers were “trading on their own account”;
   2. The principal had granted authority to the agent to affect the principal’s legal position (in contrast to the informal procedure decision in 2253787 Ontario Inc. (2014 TCC 121)). 
   3. The principal controlled the agent’s actions. 

In arriving at this conclusion, Justice D’Auray held that it was “very unlikely that the buyers would have purchased such expensive phones without an agreement that they would be reimbursed and paid a commission.”  The conduct of the buyers in purchasing the iPhones and following Mr. Liu’s instructions was evidence of an implied agency relationship. 

By way of commentary, the CRA frequently takes the position that an agency agreement does not exist where it is not evidenced in writing by the parties.  Lohas Farm Inc. demonstrates the principle that an agency agreement can be implied based on the conduct of the parties alone.

Registrants facing denials of ITCs for similar reasons should reach out to an experienced tax practitioner for assistance in dealing with the CRA.