The registrant's sole shareholder and president ("Mirabella") was a building contractor who subcontracted various elements of construction. Mirabella was aware that one of his new subcontractors (Archambault) was having problems with the authorities and was short on funds, so he paid Archambault's invoices promptly. The invoices did not represent amounts payable to Archambault, but rather to three GST-registered corporations unrelated to him. The corporations were involved in a false invoicing scheme, and none of them in fact provided supplies or services to the registrant, or were equipped to do so.
Batiot D.J. affirmed the Minister's decision to deny the registrant input tax credits for the invoices, on the basis that the registrant did not meet the requirements of s. 169(4)(a) of the Excise Tax Act. Under s. 3(c) of the Input Tax Credit Information Regulations, a registrant is required to identify the registration number of its supplier. Batiot D.J. stated that "the supplier's name must match the registration number, and the supplier must in fact be the supplier" (para. 27).
Although the registrant was innocent of any participation in Archambault's scheme, this was insufficient to make out a due diligence defence. On the contrary, the registrant was aware that Archambault was having trouble with the authorities and yet accepted without question that his invoices were accurate. Batiot D.J. cited Corporation de L'École Polytechnique v. Canada, 2004 FCA 127, for the proposition that (FCA para. 29):
The due diligence defence, which requires a reasonable but erroneous belief in a situation of fact, is thus a higher standard than that of good faith, which only requires an honest, but equally erroneous, belief.