The appellant (“North Shore”) entered into contracts in 2010 with Menova Energy Inc. for the purchase of solar panels, under which it paid one-half of the purchase price plus HST up front with the balance payable on delivery. Menova eventually cancelled 10 of 18 contracts, issued credit memos that documented its obligation to refund the associated up-front payment, including HST, but did not satisfy this obligation before becoming bankrupt. North Shore ultimately only recovered a relatively small portion of what was owed. The Minister issued reassessments to North Shore Power Group Inc. that added to its net tax amounts of HST that were “credited” to North Shore as described above.
Woods J stated (at paras 28- 29):
The question is whether an agreement to refund tax is a “credit” within the meaning of “refund or credit” in subsection 232(2)… .
…[T]he Tax Court erred in concluding that the term “credit” in subsection 232(1) takes its meaning from the commercial terms “credit note” and “credit memorandum.” …[T]hese commercial terms do not appear in subsections 232(1) and (2), which are the provisions that engage section 232 by giving the supplier the option to adjust tax. The term “credit note” is used in subsection 232(3) only to describe the documentation required if section 232 has been engaged.
Woods J further found (at paras 35, 38, and 45):
[A]t the time section 232 of the Act was introduced into law, existing case law had ascribed to the term “credit” in an income tax context the narrow interpretation from Le Petit Robert [(operation by which someone puts a sum of money at the disposal of someone else)]… .
Section 232 appears to contemplate that a credit given under this provision will actually be satisfied. It makes no sense for the supplier to be allowed a deduction from net tax and for the purchaser to be required to add an amount to its net tax if there is no transfer of funds.
[T]he term “credit” in section 232 should have the meaning from Le Petit Robert, above… . I do not suggest that money must actually be set aside, but it is not sufficient if there is no sum at the disposal of the purchaser.
She concluded (at paras 50 and 51) that as “Menova did not put funds at the disposal of North Shore when it issued the credit memos … section 232 does not apply to the transactions at issue as HST was not credited to North Shore.”