iPhone Purchases Through Straw Buyers: ITCs Denied

In 2253787 Ontario Inc. (2014 TCC 121; informal procedure), the appellants were two companies that had been set up to engage in what the TCC described as “leapfrogging” the planned country-by-country releases of Apple iPhones in 2010-11. The principal of the two firms circumvented Apple’s product release controls by arranging batches of “micro-managed purchases of product” in Canada followed by export for resale to Hong Kong. The appellants engaged a group of “initial buyers” to acquire one or two iPhones a day from Apple Stores in Canada, for which the initial buyers were reimbursed and were paid a fee.

The case arose because the CRA disallowed the firms’ claims for input tax credits (ITCs) under the Excise Tax Act. The minister argued that the appellants did not incur the HST on the initial purchases as buyers and that no agency relationship existed to allow them to claim the ITCs on the initial buyers’ purchases. Bocock J framed the issue as the ability of the “agent” to affect the principal’s legal relationships with third parties.

Bocock J noted that the seller, Apple, expressly prohibited sales of iPhones for resale or export. Had the “alleged agency” been disclosed, Apple would have refused to make the sales to the initial buyers. Alternatively, if and when the agency became apparent, Apple would have invalidated the sales and any warranty or other obligations owed to the purchasers.

Bocock J stated that concealed agency, used to “dupe” Apple into selling to the initial buyers, could not be used after the fact to insert a different would-be principal in order to obtain ITCs. As Bocock J explained, the undisclosed agency, the fact that Apple intended to contract exclusively with an initial Canadian buyer, the absolute prohibition against resale, the buyers’ inability to bind the appellants because of that prohibition, and the fact that the initial buyers’ money was used to acquire the goods undermined the basic foundation of agency.

Though these facts were sufficient to dispose of the appeals, Bocock J added that the requisite information to support the ITC claims was “simply fictitious, unreliable or missing,” meaning that it was factually impossible for the court to determine which transactions properly supported the claimed ITCs.

With respect, perhaps the TCC should have disposed of the appeals on this latter ground. One problem is that the court did not take up the well-established concept of undisclosed agency—that is, a situation in which the third party has no knowledge that it is dealing with an agent. This would not necessarily preclude a third party such as Apple from insisting that any buyers must purchase on their own account, but it is difficult to see how the undisclosed nature of the relationship vis-à-vis the third party means in and of itself that the buyers could not be serving in the capacity of agents.

A more interesting discussion would relate to the proposition that the purposes of the agency must themselves be lawful. Thus, an ostensible agency relationship established to export technology in violation of the exporting country’s laws might pose difficulty. As a general matter, however, there is no principled reason why a principal cannot give an agent authority to act illegally. This is not to say, of course, that the principal would be able to enforce an agreement reached with the third party in violation of its terms. There is a difference, then, between the illegality of the subject of the transaction itself (as between the third party and the agent) and the illegality of the contract of agency (as between the principal and the agent).

It is not normally legally problematic (though it is socially controversial) for a principal to rely on an agent to hold a place in a queue (and then to make the purchase) while awaiting the release of a desirable product. The point is that the seller, even Apple, will not necessarily have difficulty with someone other than the true buyer being the initial purchaser or the ultimate consumer. If there was true agency, Apple’s prohibition on resale would be moot because there would be no such resale (between the initial buyers and the appellants). Apple does not bar agency purchases; it appears to bar purchases for reselling.

It is also unclear why Apple’s bar on a subsequent resale or export by the appellants would render their initial purchases invalid: the focus would be more usefully placed on the prior transaction between Apple and the initial buyers. The issue in establishing agency is not the efficacy of the legal rights acquired by the principal vis-à-vis the third party (particularly on account of the principal’s non-compliance with the terms underlying the grant of those rights), but rather the ability of the agent to affect the principal’s legal relations with the third party.

Finally, it is unclear why the decision gives weight to the fact that the initial buyers used their own money to acquire the iPhones from Apple. In standard agency law, such a purchase, if reimbursed, does not undermine the notion that the true purchaser is the principal rather than the agent.

Brian M. Studniberg
Couzin Taylor LLP, Toronto

Canadian Tax Focus
Volume 4, Number 4, November 2014
©2014, Canadian Tax Foundation
6/22/2018 10:12:30 PM