Citation: 2012 TCC 401
Date: 20121114
Docket:
2010-2867(GST)I
BETWEEN:
9134-2485 QUEBEC
INC.
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
[OFFICIAL
ENGLISH TRANSLATION]
REASONS
FOR JUDGMENT
Hogan J.
[1]
On
December 16, 2008, the respondent, through the Minister of Revenue of Quebec
(the Minister), made an assessment regarding the appellant under Part IX of
the Excise Tax Act, R.S.C., 1985, c. E-15 (the ETA), for the period
from April 1, 2004, to March 31, 2008.
[2]
On
May 26, 2010, further to a Notice of Objectionfiled by the appellant, a
Revenu Québec objections officer sent the appellant a letter setting out the
adjustments that would be made to the assessment. A reassessment was then made
on July 14, 2010. As a result of the adjustments made in this reassessment
with respect to the net tax and the interest and penalties, the appellant must
pay the following amounts:
a. Adjustment
to the net tax reported: $84,568.76
b. Net
interest: $16,510.35
c. Late
remittance penalty: $7,022.44
d. Gross
negligence penalty: $21,142.19
[3]
In
making the assessments at issue, the Minister relied on the following findings
and assumptions of fact, among others:
(a) The
appellant is registered under Part IX of the ETA. It operates a sushi
restaurant and a bar with a liquor licence.
(b) All
supplies made by the appellant in operating its restaurant and bar are taxable
supplies for which a tax, namely, the goods and services tax (GST), is payable on
the value of the consideration of the supply.
(c) The
supplies related to the appellant's commercial activities were registered using
software created by Khang Nguyen. According to the respondent, during the
periods in question, the appellant used a device called a "zapper" to
erase certain taxable supplies from its accounting records.
(d) According
to the Minister, in view of the use of a zapper, the appellant's records and
accounting documents were incomplete and inaccurate, such that the appellant filed
GST returns that did not reflect its true financial situation.
[4]
Therefore,
to determine the amount of GST that the appellant collected or should have
collected during the periods in question, the total amount of the taxable
supplies made by the appellant from January 1, 2005, to June 11, 2007,
was reconstructed from the records containing all of the transactions made by the
appellant.
[5]
According
to the estimate made by the Minister, the additional sales come to the
following amounts:
a. $138,705.35
for the fiscal year ending March 31, 2005;
b. $449,996.63
for the fiscal year ending March 31, 2006;
c. $458,800.57
for the fiscal year ending March 31, 2007;
d. $236,098.71
for the fiscal year ending March 31, 2008.
[6]
According
to the Minister, a review of the available documents shows that, during the
periods in question, the appellant did not report all of the taxable supplies
for which a tax of 7 percent on the value of the consideration was payable
by the purchasers.
[7]
The
Minister's estimates also indicate that the amount of GST that the appellant
was supposed to collect during the period in question is $145,168.86, whereas
the appellant filed net tax returns reporting $60,600.10.
[8]
The
Minister therefore submits that the appellant misrepresented the facts by not
including, in the computation of the net tax that it filed, an amount of $84,568.76
in collected or collectable GST.
[9]
On
April 12, 2008, Dario Grimard, a computer technician at the Agence
du revenu du Québec (the ARQ), and an auditor went to the appellant's
restaurant to retrieve data from the appellant's electronic sales system.
[10]
According
to the testimony of Jean‑François Gingras, a point of sale systems
analyst at the ARQ who analyzed the data retrieved by Mr. Grimard, the appellant
or its consultants used "scripts" or a computer program to delete 7,307
invoices issued by the appellant during the period in question.
[11]
After
some in-depth work, ARQ computer technicians were able to recover the
information from 6,863 of the deleted invoices (the recovered invoices),
leaving only 444 missing invoices (the missing invoices) for the period in
question.
[12]
The
Minister assumed that all of the recovered invoices relate to taxable supplies
that the appellant did not report. The Minister also assumed that the
444 missing invoices relate to unreported taxable supplies with an average
value of $136.83 each. The Minister relied on these assumptions to estimate the
appellant's unreported sales, set out above at paragraph 5.
[13]
According
to the testimony of the appellant's shareholder/manager, My Thanh Phan,
a childhood friend of hers, Khang Nguyen, designed the software that the
appellant used for registering sales. The software was designed to ensure that
no food order would leave the kitchen without being registered by staff using
the software. This procedure was supposed to prevent theft or fraud. However,
Ms. Thanh claims that the software had significant shortcomings. According
to the witness, the software did not include a function for registering complimentary
meals for the appellant's employees or customers. All free meal orders were
treated as taxable sales. Furthermore, the software did not have a command for
deleting entry errors. All errors caused an invoice for a taxable supply to be
printed out.
[14]
Finally,
the system was not conducive to training new staff. Indeed, according to Ms. Thanh's
testimony, the system's training code did not work as it was supposed to. Orders
entered during training sessions were therefore treated as taxable sales.
According to Ms. Thanh, this explains the large number of deleted invoices
that the respondent recovered from the appellant's database.
[15]
According
to the appellant's witnesses, many free meals were given away during the years
at issue: three or four invoices a day for [translation]
"staff meals", gifts for relatives and for the employee of the
week, free meals in exchange for publicity, gift certificates, [translation] "staff
birthdays", and free meals for shareholders, managers and suppliers.
Despite the alleged high number of free meals, Ms. Thanh claims that she
has no accounting records for free meals and promotions.
[16]
The
cross-examinations of the appellant's witnesses reveal that they were evasive
and that their evidence regarding the lack of records for free meals and
promotions was vague. Moreover, the free meals for staff, shareholders and
their relatives are taxable benefits. Exchanging meals for services also gives
rise to taxable income. The evidence as a whole suggests that the appellant was
doing little accounting to ensure compliance with its tax obligations.
[17]
It
would appear that no thought whatsoever was given to the reporting of taxable
benefits. The testimonies of Xuan Bich Ty Hoang and My Tung Phan
also suggest that the business was not keeping inventory. On cross-examination,
they could only say that they had been trying but were still not managing to do
so.
[18]
According
to Ms. Thanh, she kept the invoices for free meals, errors or staff
training and gave them regularly to Mr. Khang so that he could cancel them
in the appellant's accounting system. Once the sales had been cancelled, new
numbers were given to the remaining invoices to restore the numerical sequence
and avoid gaps.
[19]
Ms. Thanh
states that she did not keep the paper invoices after Mr. Khang had
cancelled them. Mr. Khang testified that he restored the numerical
sequence because it was the professional thing to do.
[20]
The
version of the facts given by the appellant's witnesses was contradicted by the
respondent's evidence. The testimony of Mr. Gingras indicates that the
appellant's computer system contained an everyday database and a database used
solely for training.
[21]
The
computer system also had a button that allowed free or discounted meals to be
registered. Moreover, the respondent's witnesses observed that some of the free
meals were accounted for as no-sales. The examination of Ms. Coulombe, the
Minister's auditor, reveals that she found, in a box of documents belonging to
the appellant, a report entitled "Cancel/On House" which was filed at
trial as Exhibit I‑6.
[22]
Furthermore,
the testimony of Ms. Yip details transactions accounted for as no-sales. She
filed Exhibit I-9, a summary of transactions totalling more than
$105,936.08 for the period from January 1, 2005, to June 11, 2007,
and $53,676.06 for the period from June 11, 2007, to March 31, 2008. This
contradicts evidence filed by the appellant claiming that that free meals could
be offered only by cancelling the invoices. Indeed, sales totalling over $159,612.14
had already been accounted for as free meals in the system.
[23]
Mr. Gingras
explained that he found in the appellant's computer system a set of programs
that allowed it to erase invoices, restore the numerical sequence and gain
access to the database where the sales were registered. Preparing such programs
requires very advanced knowledge of computers. According to Mr. Gingras,
these programs are unusual. Moreover, properly functioning accounting software
does not need them. These programs are instead used to hide sales. It is very
difficult to recover the information erased by such means. The appellant
provided no reasonable explanation for the existence and use of these programs.
[24]
To
sum up, the following elements emerge from the evidence introduced at the
hearing:
·
There
was an obvious contradiction regarding the existence of a list or report for
free meals;
·
The
appellant does not deny having sophisticated programs for erasing sales;
·
There
is clear testimonial evidence that some data were unavailable when the
information was extracted from the appellant's databases.
[25]
The
following elements raise serious doubts and call into question the explanations
and credibility of the appellant's witnesses:
a. The
fact that the system has a training code and a discount button, while the
appellant claims that it uses an invoice cancellation procedure for training
and staff meals;
b. The lack
of documentation supporting the testimony of Mr. Khang regarding the
frequent errors in the systems;
c. The
discarding of invoices after cancelling them in the system;
d. The
lack of quarterly stocktaking;
e. The contradictions
and vague answers regarding how Mr. Khang's invoice cancellation procedure
works;
f. The
appellant's failure to disclose the invoice cancellations before this was
detected by employees of the Minister.
[26]
Considering
all of the evidence, I find that the invoices that were cancelled by Mr. Khang
are real sales that the appellant made but did not report. I therefore find
that the respondent has met its burden of proving that there are circumstances
justifying the imposition of penalties. For these reasons, the appeal is
dismissed.
Signed at Toronto,
Ontario, this 14th day of November 2012.
"Robert J.
Hogan"
Translation
certified true
on
this 20th day of December 2012.
Michael
Palles, Translator/Language Adviser
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