Persepolis Contracting Inc. v. Her Majesty the Queen1 is an interesting case involving agency where the Appellant's position may have been undermined by a friendship between the owners of two companies, one of which was the purported principal, leading to a lack of adequate supporting documentation.2
The case arises from an appeal by Persepolis Contracting Inc. (“Persepolis”) for a net tax liability of $47,314.05 (HST collectible of $69,492.00 less allowed input tax credits of $22,177.95), for the reporting period from January 1, 2011 to March 31, 2011. Mr. Nickpour, the sole shareholder of Persepolis, performed renovations on a building that he owned thanks to financial help from his friend, Mr. Abdollahi. Mr. Abdollahi required renovations on his own building, the Lion Hotel, which he owned through his corporation, 0781178 BC Ltd. Mr. Nickpour decided to return his friend’s favour and lend a helping hand by performing the renovations for a management fee of 15% of the cost. 0781178 BC Ltd. had two agreements with Canada Mortgage and Housing Corporation (“CMHC”), where CMHC provided a forgivable loan which would have to be repaid if conditions outlined in the agreements were not met. A Direction to Pay also authorized Mr. Wong, the notary public working on the renovation project, to disburse funds obtained from CMHC directly to Persepolis.
Mr. Nickpour believed Persepolis was acting as an agent for 0781178 BC Ltd. regarding the renovation project and did not supply a construction service. Therefore, Persepolis did not charge 0781178 BC Ltd. any HST on its purchases to perform the renovations, but instead only charged HST on its management fee. The Minister of National Revenue took the position that Persepolis was in fact supplying general contracting services, rather than acting as an agent for 0781178 BC Ltd., when renovating the property which led to the assessment for uncollected HST.
There were several documents reviewed by the Court to help determine the nature of the relationship between Persepolis and 0781178 BC Ltd., and to ascertain whether there was in fact a principal-agent relationship. The first document reviewed was a letter dated December 30, 2008, addressed to Mr. Nickpour and Persepolis from Mr. Abdollahi, on behalf of 0781178 BC Ltd. and the Lion Hotel, which included the following statements:
As we have agreed to participate in the City of Vancouver Pilot Project that will result in being fast-tracked for a CMHC grant to undertake extensive renovations of the Lion Hotel, I hereby authorize you to act on my behalf in all matters relating to the project.
To this end, I will provide you with a limited Power of Attorney for my company 0781178 BC Ltd 178 BC Ltd., [sic] which owns the Lion Hotel, to specifically deal with financial matters involving the CMHC grant.
Furthermore, I authorize your company, Persepolis Contracting, Inc., to act as the contractor for the project.
In addition, a Power of Attorney was granted to Persepolis giving it "…the power to act for 0781178 BC Ltd. in all matters pertaining to the Lion Hotel." The Direction to Pay also stated "Persepolis Contracting Inc. has been appointed my Attorney to act for me in all matters pertaining to this mortgage and to manage and complete the renovations for me at the Lions [sic] Hotel...." However, there was no management agreement between Mr. Abdollahi and Mr. Nickpour because, as friends, they trusted each other.
Did Agency Exist?
Before delving into an analysis of whether agency did exist between the two parties, it is important to understand what constitutes a principal-agent relationship. The determination of whether a person is an agent is a question of fact, but is not always clear cut, and is based on all of the facts of the situation and the application of the principles of law. The Canada Revenue Agency ("CRA") developed GST/HST Policy Statement P-182R, "Agency" (“P-182”), to help taxpayers determine whether a person is an agent. The Federal Court of Appeal referred to P-182 as "a useful tool in determining whether an agency relationship exists" in Glengarry Bingo Association v. Canada3. This statement was also reiterated by the Federal Court of Appeal in Merchant Law Group v. R.4. With the Courts’ blessing of P-182, the policy statement holds more weight than a typical CRA publication, and can be used to provide sound guidance on agency. The policy statement outlines the three essential qualities of an agency relationship: consent of both the principal and the agent; authority of the agent to affect the principal's legal position; and the principal's control of the agent's actions.
The Court first performed an analysis on whether Persepolis had explicit authority to affect 0781178 BC Ltd.'s legal position. The letter dated December 30, 2008 gave Persepolis authorization to act on 0781178 BC Ltd.'s behalf for all matters relating to the project, which could very well suggest agency. The letter further outlined that Persepolis had Power of Attorney for all financial matters involving the CMHC grant, which does not necessarily mean that agency did not exist aside from those financial matters. However, the same letter later stated that it authorized Persepolis to act as the “contractor” for the project, which suggests it had a separate role as a general contractor, as opposed to acting as agent, in respect of the renovations.
The Power of Attorney document was also reviewed by the Court. It authorized Persepolis "[t]o act for me in all matters pertaining to [the Lion Hotel]". The Court pointed out this might have suggested Persepolis was an agent in respect of the renovations. In addition, the Direction to Pay stated that Persepolis "has been appointed my Attorney to act for me in all matters pertaining to this mortgage and to manage and complete the renovations for me at the Lions [sic] Hotel..." The Court opined that it could be argued that this statement supports a principal-agent relationship; however, use of the word "including" instead of "and" would have been much clearer to suggest it was an agency relationship.
The Court concluded that explicit consent was not given by 0781178 BC Ltd., due to ambiguities in the documents submitted and examined. The fact that Mr. Abdollahi was not called as a witness did not assist Persepolis in its case, as he could have given clarity to the wording in, and intent of, the documents. The Court also determined there was no implicit consent of an agency relationship given by 0781178 BC Ltd., as there was no evidence presented indicating there was consent. It was evident that Persepolis had Power of Attorney with respect of the financial matters involving CMHC, but this was not indicative of Persepolis acting as an agent in regards to the renovations performed. P-182 indicates that remuneration of an agent is usually based on a set fee. The Court reviewed the 15% management fee charged by Persepolis, but noted this did not imply Persepolis was an agent, and added that it was unclear how and when the fee was charged, given no contract between the parties was submitted to the Court.
In my view, the Court reached the correct conclusion. I believe it could be argued that the Power of Attorney and the Direction to Pay documents represented an authority of Persepolis to affect 0781178 BC Ltd.'s legal position, even with regards to the renovations, as these documents referred to "all matters pertaining to" the hotel. However, the letter dated December 30, 2008 clearly suggested Persepolis had a separate role as contractor, distinct from its limited Power of Attorney, which contradicts the other documents and suggests 0781178 BC Ltd. did not give consent to Persepolis to represent it as an agent relating to the renovations.
The third essential quality of an agency relationship outlined in P-182 is the principal's control of the agent's actions. Mr. Abdollahi did not visit the hotel while the renovations occurred and did not ask to receive any updates from Mr. Nickpour, suggesting there was not a high degree of control by 0781178 BC Ltd. over Persepolis. The Policy Statement also indicates the principal's control over the agent's actions can be limited to ensuring the agent acts in a competent manner and within the scope of the mandate. It can be argued 0781178 BC Ltd. did not exercise a high degree of control over Persepolis, but did ensure it operated in a competent manner within their agreement. CMHC would advance funds to Mr. Wong only after inspections of each floor were completed and approved, and it could be argued that, because CMHC kept releasing funds, 0781178 BC Ltd. was ensuring Persepolis was acting within its mandate and in a competent manner.
Documentation is Key
While an argument could be made for agency, a lack of documentation to support the principal-agent relationship appeared to be the downfall of Persepolis’ position. Mr. Abdollahi and Mr. Nickpour's friendship may have led to insufficient documentation, as they did not believe they needed a management agreement, since they trusted each other. Having a management agreement in place could have been the evidence Persepolis needed to prove it was an agent for the renovations. Although not specifically analyzed by the Court, and making matters worse for Persepolis, the Appellant had provided invoices to CMHC that were billed to 0781178 BC Ltd. and included HST. Ms. Skeet, a consultant for Persepolis and the person who issued the invoices to CMHC, explained that CMHC demanded that Persepolis provide invoices that were billed to 0781178 BC Ltd. and that the invoices included HST, which is why she issued the invoices to CMHC. Persepolis did not submit any invoices directly to 0781178 BC Ltd., aside from the invoices for the 15% management fee. It never ends well when you have issued documentation showing HST was charged, and then an auditor gets his or her hands on it and discovers the tax was never remitted. Although Persepolis may have had its hands tied, since CMHC was demanding this documentation prior to releasing funds for the renovations, these actions certainly contradicted its position and suggested it should have been remitting tax.
I frequently advise clients to make sure that they have adequate documentation and all of the facts of the situation indicate a principal-agent relationship exists if they are hanging their hat on agency to support how they apply GST/HST, as it is scrutinized to a high degree by both the CRA and the Courts. When the documentation is lacking, as it was in this case, the relationship needs to clearly indicate agency existed based on the substance of the transactions. All else aside, a contractor performing renovations to a building does not sound like a typical transaction that would require agency, as compared to a property management agreement which would suggest that such a relationship exists. Not to say that an agency relationship cannot exist if it is not in a typical agency scenario, but Mr. Nickpour was unable to prove the existence of such a relationship, due to insufficient and ambiguous documentation. You do not obtain relief from your obligation to maintain proper documentation when dealing with closely related parties or friends whom you trust, which was learnt firsthand by Mr. Nickpour.
Manager, Sales Tax Recovery
1 Persepolis Contracting Inc. v. R., 2017 TCC 89, CanLII.
2 This article previously appeared in the June/July 2017 issue of GST & Commodity Tax, Vol. XXXI, No. 5 (Thomson Reuters).
3 Canada v. Glengarry Bingo Assn., 1999 CanLII 7738 (FCA).
4 Canada v. Merchant Law Group, 2010 FCA 2016 (CanLII).