By Adam Aptowitzer
It is not often that the charities community can take instruction from a GST case of the Tax Court, especially when the taxpayer is a numbered company. But the recent case of 2253787 Ontario Inc. v. The Queen1 is an important commentary on the law of agency, and if the principle there is upheld, could have significant repercussions for those charities operating through an agent both domestically and abroad.
The case dealt with the gray market of cell phone sales. Apple (as do other large companies) stagger the sale of their products internationally so that the newest release of a particular model will be available in one country before it is available in another country. Of course, ludicrously impatient residents of the country without the newest iPhone stop at nothing to secure these new models. As a result, a market has arisen for people who can secure the newest phones in one country and sell them in the other country – albeit with some premium.
One such crafty entrepreneur had friends, family and others buy new fangled iPhones in Canada and ship them to him in Hong Kong for sale there. This particular entrepreneur was incorporated and (at least for some of the purchases) a registrant for HST purposes. Readers will recall that when an HST registered business pays HST on its purchases it is entitled to claim back that HST from the government (called input tax credits or ITCs). However, the CRA denied the businesses claim for ITCs and the matter wound up before Justice Bocock of the Tax Court of Canada.
At trial the question became whether the individuals who actually bought the iPhones were acting as agents of the taxpayer. The Court, at paragraph 15, recognized the three legal requirements of an agency relationship:
It is long established law that the underlying components which enable a finding of agency are the consent of both principal and agent, the subsisting authority from the principal to agent allowing the agent to affect the rights or obligations of the principal as if it had entered the contract itself and the principal’s control of the agent’s actions.
On the first and last point the judge found that the facts clearly supported the existence of an agency relationship but on the question of whether the agent had the authority to act in the name of the principal he found that there was no agency relationship. As it turned out, Apple had included in their Apple Retail Store Purchase Policies statements to the effect that the phones could not be purchased for resale or export. By implication the Judge reasoned that if Apple had known that the people buying the phones were acting on behalf of a foreign reseller they would not have been sold the phones. So, to Apple the individuals were represented as principals buying the phones for their own use but to the CRA the same people were characterized as agents. To quote the Court:
Agency requires a consistent, clear and documented factual basis for those who view and rely upon it; a story with alternative endings serving different purposes at varying times does not meet that demand.
And, as a result, found that there was no agency relationship at all.
The Court’s logic in coming to its conclusion implies that the taxpayer cared a whit about Apple’s policies and that the individuals had to conceal their true purposes. In reality, it is likely the issue never came up and there was nothing concealed at all. They went to the store bought one or two iPhones and no Apple ‘Geniuses’ asked any questions about the person on whose behalf they were buying them. And frankly, even if they did conceal their identities, it is not clear why that would have any role in vitiating the agency agreement. Nor is it clear why it is logically preferable to assume that the individuals offending Apple’s policy were doing so of their own accord rather than on behalf of the principal (exporting being the offence of the individual purchaser).
Our understanding of the law of agency would suggest that offending the Apple policy should have nothing to do with the determination of whether or not an agency relationship exists. If the Agent, while acting in this capacity, acts in an improper manner then the injured party can seek redress from the Principal. The decision of the Court would seem to suggest that breach of contract by the Agent (at least in cases of malice aforethought) immediately severs the link between Agent and Principal. If that’s true then the injured party may not be able to seek compensation from the Principal and Apple could now not sue the Corporation that profited from the arrangement but only those individuals who purchased the iPhones on the Corporation’s behalf.
The application of this logic to the charity sector – specifically those operating through an agency agreement – is not hard to see. If the Court’s application of the law is correct then anytime an agent purports to engage in an action contrary to local law or policy then the Agency arrangement would be terminated protecting the charity from liability. That this could be the case is all the more perplexing given that Canadian charities use foreign agents to conduct activities that Canadians cannot undertake in that part of the world. If this is an accurate statement of the law then Canadian charities likely have a new means of liability protection. Given this rather large implication to the law of agency, this case is probably an outlier (if not appealed) and should be ignored by any charity attempting to use it to duck responsibility for the actions of an Agent.