The recent Tax Court decision in Persepolis Contracting (2017 TCC 89) is another example of how the concept of agency is so important in the GST context.  The case serves as a reminder that written documents will be central to the determination of whether an agency relationship exists, and suggests that it might be difficult to establish that written agreements constitute evidence of agency.

On the facts, Persepolis Contracting (“PC”) agreed with the owner of Lion Hotel in Vancouver (a numbered company, hereinafter, “Owner”), to renovate the hotel.  The arrangement was such that PC would incur expenses to complete the renovations and upon the completion of a floor, a City inspection would be completed.  Upon successful inspection of each floor, Canadian Mortgage and Housing Corporation (“CMHC”) would release grant funds (which was essentially a forgivable loan).  The Owner provided a Direction to Pay to CMHC, which directed the grant funds to be released to PC, less a 10% hold-back. 

The following documents were included as evidence at trial:

1. Letter from the Owner to PC stating that PC was authorized to act on Owner’s behalf “in all matters relating to the project”; that a limited Power of Attorney would be provided to PC to “deal with financial matters involving the CMHC grant”; and authorizing PC “to act as contractor for the project”.
2. Power of Attorney from Owner to PC giving PC the power to act for the Owner in all matters pertaining to the hotel;
3. Direction to Pay (referenced above), which stated that PC was appointed the Owner’s attorney “to act for [the Owner] in all matters pertaining to this mortgage and to manage and complete the renovations for [the Owner] at the hotel”.
4. Operating Agreement between CMHC and the Owner, requiring the Owner to abide by certain conditions in exchange for the grant.
5. Three invoices from PC addressed to the Owner, indicating HST payable.

Evidence at trial was that the invoices were issued to the Owner at the demand of CMHC, who required them in order to release the grant and that this was the only reason they were issued. 

CRA assessed PC on the basis that PC supplied the Owner renovation services for which it received the amount of the CHMC grant (less the hold back amount) as consideration.  Accordingly, PC was liable for GST/HST that it failed to collect from the Owner for the renovation services that it provided. 

PC appealed to the Tax Court arguing that it acted as agent of the owner in completing the renovations such that PC did not make any supply to the Owner.

In determining whether PC acted as agent of the Owner, the Court focused on whether the Owner explicitly or implicitly consented to PC entering into contracts on its behalf with respect to completion of the renovations. 

In doing so, the Court noted that the Power of Attorney document authorized PC to “act for [the Owner] in all matters pertaining” to the hotel, which in the Court’s view might suggest a power of attorney to act as agent vis-à-vis the renovation.  The Direction to Pay indicated that the Owner appointed PC as its Power of Attorney “in all matters pertaining to this mortgage and to manage and complete the renovations…” (emphasis added).   The Court noted that this was not determinative either way as it suggested that the power of attorney might only be limited to financial matters (as evidenced by the use of the word “and”).  

The Court concluded that it was not clear based on the documents whether the parties agreed to an agency relationship solely for the purpose of dealing with CMHC or also for the purpose of carrying out renovations.  None of the documents established on a balance of probabilities that the Owner expressly consented to establish an agency relationship vis-à-vis the renovations.

In terms of implicit consent, the Court stated that no evidence was submitted on this point.  Accordingly, the Court concluded that PC did not act as agent for the Owner in completing the renovations such that PC was considered to have made a taxable supply to the Owner and thus liable for HST not collected from the Owner.

This case demonstrates the level of scrutiny that will be imposed on documents that purport to establish an agency arrangement, when considering whether a taxable supply was made.  As an aside, it is not uncommon for these agency-type of cases to come before the court with no written documents in support of such a relationship at all.  

With respect, in our view, the documents at issue ought to have been considered sufficient to demonstrate explicit consent on the part of the Owner to appoint PC as its agent with respect to the renovations.  Documentation clearly indicated that PC was appointed the Owner’s Power of Attorney “in all matters relating to the project”, which ought to be sufficient.    With respect, the standard imposed by the court appears to require perfection on the part of commercial parties in drafting agency-type agreements. 

This case serves as an important reminder to obtain professional advice in drafting such agreements at the outset, in order to avoid any unintended tax consequences.