TCC Reversal: ITCs Allowed on iPhone Purchases Through Straw Buyers

Although 2253787 Ontario Inc. v. The Queen (2014 TCC 121) held that the taxpayer was not permitted to claim input tax credits (ITCs) on purchases of iPhones through "straw buyers" for export, the opposite result was reached in Lohas Farm Inc. v. The Queen (2019 TCC 197). The difference in outcomes, despite seemingly similar facts, may be attributable in part to Apple's more vague sales restrictions against exports at the time of the taxpayer's activities in Lohas. This may have led the court in Lohas (but not in 2253787 Ontario) to find that there was a valid agency relationship despite the absence of a written agreement. Another relevant factor may have been that the documentation in Lohas was relatively more complete and abundant than in 2253787 Ontario.

In Lohas, the taxpayer exported newly released iPhones, purchased from Vancouver-area Apple stores, to customers in Hong Kong and Taiwan, where those models were unavailable at that time. In order to circumvent Apple's purchase limit of two iPhones per customer per day, the taxpayer used friends and acquaintances of its owner to purchase the iPhones as agents. The court had to determine whether the taxpayer was entitled to claim, in its capacity as principal, ITCs for the GST charged on the purchases made by the agents. In its analysis, the court examined two main issues: (1) whether there was a valid agency relationship, and (2) whether the documentation for the purchases satisfied the Input Tax Credit Information (GST/HST) Regulations.

In the absence of a written agreement, the court relied on an examination of the parties' conduct to determine whether an agency relationship existed by implied contract. The court found sufficient grounds to believe that both the principal and the agents consented to the agency relationship, and that the principal controlled the agents' actions.

One of the key determinative factors in Lohas, and similarly in 2253787 Ontario, was whether the agents were capable of affecting the legal position of the principal where the principal was acting in a manner that violated Apple's policy (that is, acting "illegally"). The Crown's position was that the agents could not affect the legal position of the taxpayer, since the taxpayer could not have contracted with Apple. Rejecting this argument, D'Auray J stated that even if the purchases were made in violation of Apple's policy, at most this made the purchase contracts voidable, not void. It is clear from the evidence that the contracts were never voided and remained binding on the taxpayer. The court distinguished this case from 2253787 Ontario by stating that the Apple policy had since become more vague in that it only restricted sales to "end-users," whereas the policy under which 2253787 Ontario was decided explicitly prohibited purchases for the purposes of export.

The court then found that the reports prepared by the taxpayer showing the name of each buyer, the iPhone purchases, the GST/HST amount, and the commissions paid were sufficient as documentary support for the purposes of claiming ITCs on such purchases, despite the fact that many of the receipts issued by the Apple stores had missing, fictitious, or unreadable names for the agents. In a limited number of instances where no report was prepared, the ITCs claimed were denied.

A more detailed analysis of 2253787 Ontario and the agency issues it raises can be found in "iPhone Purchases Through Straw Buyers: ITCs Denied" (Canadian Tax Focus, November 2014).

Puyang Zhao
Fasken Martineau DuMoulin LLP, Toronto

Canadian Tax Focus
Volume 9, Number 4, November 2019
©2019, Canadian Tax Foundation