Citation: 2010 TCC 618
Date: 20101202
Docket: 2008-3306(GST)G
BETWEEN:
BIJOUTERIE ALMAR INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre J.
[1]
This is an
appeal from an assessment dated April 18, 2008, made in respect of
the appellant by the Minister of Revenue of Quebec (the Minister) under
Part IX of the Excise Tax Act (ETA) for periods from August 2003
to March 2007 (33 periods) and for the amount of $3,911,530.61,
including penalties and interest (see Reply to the Notice of Appeal, paragraph
11, and Exhibit A-1).
[2]
In that
assessment, the Minister disallowed input tax credits (ITCs) in the
amount of $2,310,614.18, including an amount of $2,303,351.63 in respect of
supplies of gold jewellery that the appellant had allegedly never acquired. The
appellant challenges only that part of the assessment and therefore claims ITCs
in the amount of $2,303,351.63 (see Reply to the Notice of Appeal,
paragraph 13, and Notice of Appeal, paragraph 6) and seeks the
cancellation of the penalties and interest assessed under section 280 of
the ETA, and of the penalty imposed under section 285 of the ETA.
[3]
More
specifically, the Minister disallowed the ITCs claimed in respect of gold
jewellery that the appellant claims to have purchased from two suppliers, as
detailed below:
|
2867-8555 Québec Inc. (JemGold)
|
$1,461,022.87
|
|
4114299 Canada Inc.
|
$842,328.75
|
|
Total:
|
$2,303,351.63
|
[4]
According
to the respondent, the documents submitted by the appellant in support of the
disallowed ITCs are false and are accommodation invoices, because, according to
the Minister, the appellant had not purchased any gold jewellery from those two
suppliers. In the Reply to the Notice of Appeal, the respondent maintains that
the two companies mentioned above were owned by Michel Henri and that
those companies had neither the staff nor the equipment necessary to
manufacture such large amounts of jewellery. Nor did they acquire such an
amount of jewellery as would have enabled them to supply the appellant with what
it claims to have purchased. The respondent further contends that the invoices
submitted do not provide a description sufficient to identify the jewellery
that had allegedly been sold by the two suppliers in question and that instead
they merely state "assorted gold jewellery" or "assorted gold
merchandise". It is my understanding that 2867‑8555 Québec Inc.
(JemGold) ceased to exist once 4114299 Canada Inc. was created.
That company took over JemGold's assets (see Audit Report, Exhibit A‑8,
page 4).
Facts
[5]
The
appellant called eleven witnesses, and the respondent called five witnesses.
The president of the Appellant, Allan Puzantyan, testified first. He and an
associate, Berc Pabucyan, who also testified, have been operating the business
since 1993.
[6]
In the
beginning, they manufactured gold and silver jewellery using moulds. The
jewellery manufactured was sold to wholesalers and retailers. In 1999, they
started to buy jewellery wholesale for resale. Berc Pabucyan continued to
be in charge of manufacturing jewellery and Allan Puzantyan took on the
purchase and resale part of the business. They had 13 or 14 employees at that
time. Over the years, the manufacturing of jewellery slowed down, and, during
the years at issue, it represented about 30% of sales. As a result, the number
of staff decreased, and the business now has 3 employees.
[7]
The
company's place of business has always been the same: on Cathcart Street in Phillips Square in Montreal. There is a showroom with counters and
four other rooms.
[8]
Allan
Puzantyan met Michel Henri through his uncle. They started doing business
together in August 2003. At first, Michel Henri would go to
Allan Puzantyan’s place of business to show him the jewellery he had for
sale. Later on, it was Allan Puzantyan who went over to Michel Henri’s
premises. Michel Henri's place of business was also in Phillips Square, a four‑minute walk
away. Michel Henri’s premises contained a showroom with several displays.
[9]
Mr. Henri
stated in his testimony that part of his jewellery inventory was kept elsewhere,
in two different places, one of which was on Bates Street and the other on Mont‑Royal Street, both in Montreal.
[10]Mr. Puzantyan explained that he would
make an appointment with Mr. Henri before going to meet him at his place
of business in Phillips
Square.
Mr. Henri worked with Jan Cienki, who was his right‑hand man.
Mr. Henri's brother, Paul Henri, was also occasionally on the
premises. Mr. Puzantyan selected his jewellery and negotiated the price
with Mr. Henri, which was calculated by weight according to the price of
gold at the time, with an additional amount for labour. There were no
transportation costs because of the proximity of the two places of business.
The jewellery was simply put in a bag, which was transported from one place to
the other on foot, without any particular security. It could have been any one
of Allan Puzantyan, Allan Puzantyan’s father (Levon Puzantyan),
who was helping his son, Mr. Cienki or Mr. Henri who transported the
jewellery once the transaction was finalized.
[11]Mr. Henri accepted payments spread over a set
period of time. Invoices demonstrating the practice were filed in evidence.
Thus, for example, in Exhibit A‑4, Volume 2, Tab "July", there is
invoice number 04371 dated July 2, 2004, which indicates that
there was a sale of "assorted gold jewellery" to the appellant by
JemGold for an amount of $200,000 before tax and $230,050 with tax. According
to what is indicated on that invoice, the payment was made by cheque in three
instalments, on September 9, 10 and 14, 2004.
[12]Mr. Puzantyan explained that the
description "assorted gold jewellery" was in keeping with jewellery
industry practice. Jewellery sold is itemized only for the purposes of
importation from abroad. Locally sold jewellery is never itemized. This was
confirmed by Jan Cienki and Michel Henri, who explained that there would
not be enough space on an invoice to write out every piece of jewellery sold,
given the quantity involved. Mr. Cienki explained that 98% of invoicing
was done in this way and that such was the procedure followed in the industry.
[13]Mr. Puzantyan explained that payment could
be spread over six to nine months, but that it could just as well be
made on delivery of the jewellery or over a shorter period, as demonstrated by
the example of the invoice referred to above. Mr. Puzantyan also said that
he could lose money on some purchases of jewellery. Thus, if he did not resell
the items within a certain time, he tried to liquidate them or simply melted
them down either to manufacture new jewellery or to make gold ingots, which he
resold mainly to a company specializing in that field, Federal Commercial
Metals & Company (Federal Commercial), for the market price of gold.
He stated that, when he melted the jewellery down, he calculated a loss of
about 3% on that jewellery (taking into account the price of gold and labour).
Overall, he said that he had made profits from the jewellery that he had
purchased from Michel Henri and from other suppliers.
[14]The financial statements filed as
Exhibit A‑5 show gross sales of 11 to 18 million dollars
from 2004 to 2007, gross profits ranging from $700,000 to
$1 million for the same period and an inventory turnover rate of two or
three months (as calculated by the appellant by dividing gross income by
the value of the inventory at year‑end, which is admitted by both parties
herein).
[15]Mr. Puzantyan also acknowledged that he
had bought merchandise directly from suppliers in Italy, as demonstrated by the invoices filed as
Exhibit A-7. However, he said that, although he knew many suppliers there, he
did not favour that option since he had to pay the sale price in full before
the merchandise would be delivered. The advantage of going through
Mr. Henri was that Mr. Henri gave him financing by allowing him to
pay in instalments. The evidence discloses that he also bought in Mexico
(Exhibit I‑1), the United States (Exhibit I‑2) and Spain (Exhibit I‑3).
[16]In cross-examination, Mr. Puzantyan
admitted that sometimes he paid for the jewellery he bought with gold ingots.
This was confirmed by his father, Levon Puzantyan. An example was given in
Exhibit A‑4, Volume 2, Tab "Dec.", where invoice
number 06112 dated December 7, 2004, for a total of $301,377
including tax, was paid in gold. Attached to this invoice are three cheques
made by the appellant to Federal Commercial, which were allegedly used to buy
the gold in order to pay the invoice.
[17]Levon Puzantyan compiled all the invoices
covered by the assessment for which he had (with the exception of one invoice)
traced the payment made to the two suppliers, or to others parties acting on
their behalf, whether by ordinary cheque or by certified cheques for which he
had the receipts from the bank. He also noted every invoice that had been
purportedly paid with gold bought from Federal Commercial and the cheques made
out to that entity for the purchase of the gold that was allegedly used to pay
the suppliers. All the appellant's bank statements are attached, and they
demonstrate that all the cheques in question were drawn on the appellant's bank
account. This compilation was filed as Exhibit A‑4, Volumes 1, 2 and 3.
[18]Arman Puzantyan, Allan's brother and
Levon's son, also testified. He worked for the appellant for 12 years. He
occasionally selected jewellery with his brother Allan at
Michel Henri's place of business. He said that he had gone there ten or so
times and had transported jewellery himself twice using a suitcase with casters.
He stated that Jan Cienki and Michel Henri's brother, Paul, had also delivered
jewellery to the appellant. Arman Puzantyan was a vendor himself in
Western Canada and Toronto. He transported jewellery
valued up to $400,000 without any special security measures. He was away once a
month on average.
[19]Berc Pabucyan, Allan Puzantyan's
associate, confirmed that they bought their jewellery from Michel Henri
and that they transported it themselves or that it was personally delivered to
the appellant either by Michel Henri or by Jan Cienki. He also confirmed that,
if the jewellery did not sell, they melted it down to make gold ingots, which
they sold to Federal Commercial.
[20] Denis Filiatreault, a sales
representative for the appellant, also testified. He is not related to the
appellant's owners. He was an employee assigned to the counter at the place of
business on Cathcart
Street from 2004 to
2007.
[21]He described the showroom as a large U-shaped
counter surrounded by shelves of jewellery on the walls. He together with
Arman Puzantyan (when Arman Puzantyan was not selling jewellery in
Western Canada) dealt with buyers. He said that there were always people coming
in to buy jewellery (the clients were mainly Montreal jewellery stores). Moreover, he saw two or
three suppliers per day, including Michel Henri. He never saw Michel Henri with
any merchandise, but he did see Jan Cienki and Paul Henri bring merchandise.
The jewellery was first weighed in the office for inventory control and then
brought into the showroom.
[22]Next Michel Henri testified. He has worked
in the jewellery industry since 1989. He started out as a commission salesman
and several years later opened his own business specializing in the purchase
and resale of jewellery.
[23]He had met Jan Cienki earlier, and they
decided to work together, but Michel Henri was the owner and made all the important
decisions. He met Allan Puzantyan when he was just starting out. He
approached him to sell him jewellery, and they did a great deal of business
together. When Michel Henri received merchandise, he called
Allan Puzantyan, who came to select the jewellery he wanted. Michel Henri
then negotiated the price according to the price of gold at the time, and also
taking into account his profit margin. Payment was made either immediately or
in instalments. He confirmed that the persons who transported merchandise
between his place of business and that of the appellant were those mentioned by
the other witnesses.
[24]Mr. Henri had obtained financing from a
company called C.A.B.L.E., and sometimes the appellant had to pay C.A.B.L.E.
directly. Michel Henri had more than ten other clients in Montreal and clients in Toronto as well. He stated that he had
several suppliers and that he also sometimes sold to Federal Commercial when he
needed money.
[25]Jan Cienki confirmed that he worked with
Michel Henri and that he had sold jewellery to Allan Puzantyan during a four- or
five-year period. He also confirmed that Michel Henri had other clients. He
said as well that he and everyone who worked with Allan Puzantyan could
transport jewellery from one place to the other and that payment was just
handed over. He said that Michel Henri kept his jewellery in vaults at the
main office in Phillips
Square and on Bates Street.
[26]Emmanuel Phaneuf, a trustee in bankruptcy
at Raymond Chabot Inc., managed the bankruptcy file of 4114299 Canada Inc.,
which declared bankruptcy in August 2007. The bankrupt’s property was
seized by the Minister in June 2007. It included equipment used to melt
down gold (including ovens), a scale and cooling pads used in processing gold [Translation] "at the plant",
as well as moulds, welders and other industrial machines (Exhibits A‑9, A‑10
and A‑11). Mr. Phaneuf explained that the seized jewellery
inventory that was kept in the vault of the Canadian Imperial Bank of Commerce
(CIBC) had been valuated for bankruptcy purposes at a total of $15 million.
Each item was listed and labelled. He filed Exhibit A‑12 in this
regard.
[27]David Malka, who has been a wholesale
jeweller for 36 years, also testified. His place of business has been on Cathcart Street, near Phillips Square in Montreal, for the last 22 years. He buys jewellery
locally, imports it from abroad and manufactures it on site. He sells only to
jewellers. He as well bought from JemGold. When Michel Henri received
merchandise, he contacted Mr. Malka, and Mr. Malka bought the
jewellery he wanted, quickly settling the bill. He did business with
Mr. Henri in that way from August 9, 2001 to
October 5, 2004, as shown by the chronological details for his
suppliers, which he listed and filed as Exhibit A‑13. He also attached
thereto a few invoices from JemGold.
[28]Some of them are exactly like those produced
by the appellant as Exhibit A‑4, the difference being that some of
them indicate 14kt – 18kt in addition to the words "assorted gold
jewellery". On one invoice there appear two words; one is "chains"
and the other I was unable to make out. Mr. Malka explained that, if he
paid quickly, he was given a better price for the merchandise, which was
delivered by Michel Henri’s brother to his place of business, located just a
stone’s throw away. Mr. Malka then gave him a cheque in payment, which was
sometimes postdated. He said that he had seen Allan Puzantyan several times.
[29]Ani Hovanessian, who is likewise a
jewellery wholesaler and who has been carrying on that business in Toronto for 15 years, also
testified. She is the CEO of Shiny Jewellers, which is owned by her father. She
is in charge of all purchases. She imports jewellery from all over the world
and resells to retailers in Canada.
She said that she had bought Italian gold jewellery from Michel Henri. He, his
brother or Jan Cienki generally came to sell his products at her place of
business in Toronto, but she has also gone to Michel Henri's place of business
in Phillips Square in Montreal two or three times.
[30]The price negotiated was based on the
price of gold at the time, to which labour, taxes and a profit margin were
added. She took the jewellery back with her. She did not use a courier service.
She also filed a few invoices as Exhibit A‑14, which are in the very
same format as those provided by the appellant (Exhibit A‑4). She
started buying from Michel Henri in October 2002 and said she stopped
in January 2005. She paid right away or in a week’s or a month’s time.
[31]Kevin Klieman, a Toronto jewellery wholesaler, who operates under
the name of Traders, was the last witness for the appellant. He co-owns Traders
with a certain Frank Merdocca. They have been manufacturing and importing
gold and diamond jewellery, and selling it to retailers, for 13 years. He also
bought from Michel Henri from October 2003 to November 2006. He
travelled to Montreal in order to buy jewellery
directly at Michel Henri's place of business. The price he was given was based
on the price of gold, to which Mr. Henri added a profit margin.
Mr. Klieman paid him by means of cheques, usually over a period of
six or seven months. He also took the jewellery back with him.
[32]He said that he had seen
Allan Puzantyan at Michel Henri's place of business, and that he knew
of several other business owners who bought there.
[33]He also produced purchase invoices from
Michel Henri, which were in the same format as those submitted by the appellant
(Exhibit A‑15). The invoices tendered had been paid to C.A.B.L.E.,
which had seized the accounts receivable of 4114299 Canada Inc.
[34]On a few occasions, the merchandise was
delivered to him by JemGold on consignment accompanied by a delivery slip. He
could return the merchandise or he could keep it, in which case, he received an
invoice.
[35]For the respondent, I first heard the
testimony of Nancy Gaudreault, who was the Minister's auditor in the
appellant's case. In her audit report filed as Exhibit A‑8, she
noted that the proportion of purchases made by the appellant from JemGold and
4114299 Canada Inc. (the two suppliers for which she had denied the appellant ITCs)
was, in one year, as high as 83% of the appellant's total purchases. From the
document filed as Exhibit I‑4 it can be seen that the appellant's
purchases from those two suppliers as a proportion of its total purchases was
60.5% for the fiscal year ending on March 31, 2004, 83.64% for the
year ending on March 31, 2005, and 72.87% for the year ending on
March 31, 2006, and then dropped significantly to 0.89% for the year
ending on March 31, 2007.
[36]Moreover, the appellant's sales to Federal
Commercial that resulted from the melting down of jewellery bought represented
34.8% of its total sales for the 2004 fiscal year, 45.25% for the 2005 fiscal
year, 27.64 percent for the 2006 fiscal year and 4.92% for 2007 (Exhibit I‑5).
These sales of scrap gold were made not only to Federal Commercial but also to
other clients. Thus, for the 2006 fiscal year, the total of the
appellant's scrapgold sales was 30.89% of its total sales, while the figure was
11.39% for the 2007 fiscal year (Exhibit I‑6). During her audit, Ms. Gaudreault
had been told by the appellant's agent that there was a loss of about 7 or 8%
on scrapgold sales.
[37]Concerning her decision not to accept the
purchase invoices for the purpose of granting the appellant ITCs, she said
that, following the audits conducted by the Minister in respect of JemGold and
4114299 Canada Inc., in which she herself was not involved, the Minister had
concluded that those two suppliers were not able to have supplied the
jewellery. On that basis, she concluded that neither of these suppliers, which
were owned by Michel Henri, could have supplied the appellant. She also considered
that the invoices filed in evidence were not detailed enough. According to her,
the weight and unit price of the jewellery bought should have appeared on the
invoices. In cross‑examination, she acknowledged that the inventory taken
at the appellant's business on April 20, 2006, by the Minister showed
that there was on‑site inventory worth $1,652,487 in total and stock that
had been sent to Miami,
Florida, that was
worth $1,152,584 (Exhibit A-7, document E-2). She also
admitted that the absence of transportation costs and the fact that the
appellant had purchased directly from suppliers in Italy had influenced her decision, but she had
not asked any explanations.
[38]Huu Bang Nguyen, a tax auditor for the
Minister, then testified for the respondent. He audited the purchases made by
4114299 Canada Inc. for which it had claimed ITCs from April 2004 to
March 2006. He noted that five suppliers of that company had no place of business
nor did they carry on any commercial activity.
[39]A list of 4114299 Canada Inc.’s suppliers can
be found in Exhibit I‑8. The first of the five suppliers in question
is A.N.D. jewellery (A.N.D.). 4114299 Canada Inc. claimed to have
bought $38 million worth of jewellery from A.N.D. during the period at issue
and claimed ITCs in the amount of some $2.7 million.
[40]Pierre Gariépy, an auditor for the
Minister, audited A.N.D. for the period from April 30, 2004, to
January 31, 2006. According to Mr. Gariépy, who also testified,
that business kept no books or records, but had filed tax returns until it was
sold in January 2005. However, it had no documents substantiating its
purchases. It had only sales invoices, and its biggest client was 4114299
Canada Inc. (Exhibit I‑9). Mr. Gariépy closed A.N.D.'s goods
and services tax (GST) account on January 31, 2006, since it was
not operating any business. In addition, Mr. Nguyen noted that its
president reported a very low income and that he was also the president of two
companies, which declared bankruptcy in 2004 and 2005. A.N.D.
was apparently assessed for $15.9 million in unpaid GST.
[41]The second of 4114299 Canada Inc.’s
suppliers analyzed by Mr. Nguyen was A.S.N. jewellery (A.S.N.).
That company underwent an audit conducted for the Minister by Marina Raposo.
She explained in court that A.S.N. had filed tax returns from July 2001 to
March 2004. Starting in April 2004, there were no more invoices or
accounting documents. She was unable to trace the suppliers in respect of which
A.S.N. had claimed ITCs which were disallowed. Exhibit I‑8 shows
that 4114299 Canada Inc. apparently bought $35.5 million worth of
jewellery from A.S.N. However, Ms. Raposo did not take this into account
in her draft assessment for A.S.N. since, when she was working on A.S.N.'s
file, the audit of 4114299 Canada Inc. had not yet begun. Following
Ms. Raposo's audit, Mr. Nguyen disallowed the ITCs claimed by
4114299 Canada Inc. in the amount of approximately $2.5 million for
purchases from A.S.N., especially since A.S.N. had filed no tax returns since 2004.
[42]The third supplier with respect to which
4114299 Canada Inc. was disallowed ITCs (in the amount of roughly $2 million)
was 9141-2882 Québec Inc., whose president was the same, as A.S.N.’s. Ms. Raposo
audited this company, which issued many invoices but filed no tax returns. For
his part, Mr. Nguyen noted that that company had no place of business.
[43]The fourth of 4114299 Canada Inc.’s
suppliers with respect to which Mr. Nguyen disallowed ITCs (in the amount
of $234,554) was Kristor Inc. That company was audited by Ms. Raposo. It did
not file tax returns and did not provide all of its sale invoices to
Ms. Raposo. Kristor claimed to have purchased $52 million worth of
jewellery from A.N.D and A.S.N., when those two companies were clearly unable
to supply that jewellery.
[44]The fifth of 4114299 Canada Inc.’s
suppliers with respect to which Mr. Nguyen disallowed ITCs (in the amount
of $2,084) was Jackin-Or. Mr. Nguyen did not visit that company’s place of
business, but its president's income was very low, and thus Mr. Nguyen disallowed
all the ITCs claimed.
[45]In all, Mr. Nguyen refused 4114299 Canada
Inc. a total of $7,511,868 in ITCs in respect of supplies of gold alone. In
cross-examination, he acknowledged that he had not analyzed the sales of
4114299 Canada Inc. to buyers listed in
Exhibit I‑8, including the appellant.
[46]The respondent also called as a witness
Myrlande Rochelin, who audited JemGold for the Minister for the period
from September 1, 2000, to February 24, 2004. She checked
whether JemGold’s seven biggest suppliers were filing tax returns. A list of
those suppliers can be found in Exhibit I‑10. In all, she disallowed
ITCs in the amount of $7,750,996 claimed by JemGold in respect of purchases it
had allegedly made from those suppliers during the period from
September 1, 2000, to February 24, 2004. Those suppliers
did not file tax returns and had no places of business. In cross-examination,
she said that she had not focused on JemGold's sales, since there were too many
problems with its purchases. My understanding is that she felt that JemGold
could not have sold what it had not bought.
[47]Ms. Raposo also audited some of JemGold's
suppliers. Among these was Serkab jewellery, which pleaded guilty to providing
accommodation invoices to JemGold. In addition, she noted that, for 2003,
JemGold was disallowed, for the purposes of its ITC claim, 90% of its total purchases
according to its financial statements (Exhibit I‑10). In
cross-examination, Ms. Raposo stated that the appellant did not appear in
her audit as a buyer with respect to any of the suppliers she audited.
Arguments of the parties
[48]The appellant argues that, just because the
owner of the two jewellery suppliers with respect to which it is claiming the
ITCs at issue was accused of fraud, it should not have to suffer the
consequences.
[49]The appellant submits that it has been for
years a profitable business whose inventory turnover rate is two or three
months according to its financial statements, as the Minister was able to
verify by looking at the stock in inventory on site. The appellant argues that
it negotiated no discounts with the suppliers in question when it bought the
jewellery and that proof of payment has indeed been provided in the form of
invoices to which cheques or receipts and bank statements are attached. The
appellant called several witnesses who confirmed industry practice and
corroborated the assertion that the appellant had in fact bought the jewellery
for which it is claiming ITCs disallowed by the Minister. The appellant submits
that its witness Mr. Phaneuf, the trustee in bankruptcy for 4114299 Canada
Inc., confirmed the existence of the business of Michel Henri, who owned the
equipment necessary to manufacture jewellery. Mr. Phaneuf also referred to
the jewellery inventory of about $15 million owned by Mr. Henri. Moreover,
representatives of competitors of the appellant said in their testimony that
they had bought jewellery from Mr. Henri.
[50]According to the appellant, all of the
respondent's evidence rests on the fraud purportedly committed by Michel Henri
and some of his suppliers. The appellant is not among the businesses targeted because
of fraud. The evidence does not show any collusion on its part. The evidence
does not show that the appellant is a business that was established for the
sole purpose of participating in a fraudulent scheme. The respondent merely proved
the insolvency of the suppliers used by Michel Henri's businesses and did
no analysis of the sales made by those businesses. The respondent submitted no
evidence that those who bought from Michel Henri — and even less so the
appellant — were aware of their suppliers’ alleged fraud. The weight of the
evidence shows that the appellant did indeed buy the jewellery from
Michel Henri and that it did so in accordance with industry practice. It
is not the appellant's responsibility to bear the economic burden created by those
who are accused of fraud.
[51]The respondent, for her part, says she does
not deny the existence, as such, of Michel Henri's businesses. What she denies
is the supply of jewellery that the appellant claims to have received. The
respondent does not believe that the appellant purchased as great a quantity of
jewellery as it claims or that it did so for the prices indicated on the
invoices. Moreover, the invoices do not indicate the exact quantity of
jewellery bought.
[52]The respondent argues that the fact that
Michel Henri's suppliers were not in a position to supply all of the jewellery
is important in this case since it shows that Michel Henri did not have sufficient
inventory to supply the amount of jewellery that the appellant claims to have
purchased. Up to 80% of the jewellery bought by the appellant in one year alone
came from Mr. Henri's businesses, and about 70% of those businesses’
purchases have been disallowed since there were no actual suppliers. How could
Michel Henri have resold so much jewellery to the appellant? In addition, in
analyzing the invoices issued to the appellant that were filed as Exhibit A‑4,
the respondent noted that the numbering of the invoices was inconsistent.
[53]Finally, the sales of scrap gold are too
high. Why buy so much jewellery and then resell it at a loss in the form of
scrap gold?
[54]The appellant simply emphasized in reply
that the fact that some of Michel Henri's suppliers provided false
invoices does not mean that Michel Henri had no jewellery to sell.
Analysis
[55]In disallowing the ITCs claimed by the
appellant on the purchases of jewellery from JemGold and 4114299 Canada Inc.,
the Minister based his decision on, among other things, the allegations in
paragraph 18, subparagraph (g) et seq. of the Reply to the Notice of Appeal,
which read as follows:
[Translation]
(g) The appellant did not
provide the Minister, when it was required to do so, with sufficient evidence,
including prescribed information to establish the amount of $2,303,351.63 in
ITCs, mentioned in the previous subparagraph, which it had claimed in
calculating its net tax for the 33 periods in question and which it obtained.
(h)
More specifically, in order
to establish the said amount of ITCs, the appellant provided the Minister with
supporting documentation that did not meet the requirements of the ETA and the
regulations thereunder.
(i)
Basically, the documentation
in support of the disallowed ITCs in the amount of $2,303,351.63 with respect
to supplies of gold jewellery it had acquired during the 33 periods in question
is false and consists of accommodation invoices issued to enable the appellant
to claim ITCs without entitlement in calculating its net tax for the 33 periods
in question.
(j)
The purpose of the scheme is
to use so‑called "accommodation" invoices in order to claim
ITCs to which there was no entitlement in view of the ETA requirements.
(k)
In this case, the appellant,
who was the "accommodated" party, used the services of third parties
operating real or dummy businesses, as the case may be, those third parties
being the two (2) suppliers in question which were the
"accommodating" parties and which would issue invoices to the
appellant for supplies of products that they did not make to the appellant and
that the appellant did not acquire from either one of them.
(l)
The appellant did not acquire
any of the supplies of gold jewellery at issue from the two (2) suppliers.
(m)
The two (2) suppliers were
owned by Michel Henri.
(n)
The two (2) suppliers in
question had neither the staff nor the equipment to manufacture so much
jewellery nor did they purchase such a quantity of jewellery that they would have
been able to make the supplies that they had undertaken to make to the
appellant.
(o)
The supporting documentation
(invoices) submitted does not contain a description sufficient to identify the
supplies made by the two (2) suppliers, which were acquired by the
appellant (the quantity and quality of the jewellery supplied, the consideration
for each item, etc.), but indicates only "assorted gold jewellery",
"assorted gold merchandise" or some similar phrase, and shows only
the total amount to be paid as consideration for the supplies.
(p)
Consequently, the appellant
owes the Minister the amount of the adjustments to its net reported tax for the
33 periods in question, plus penalties and interest.
[56]In Hickman Motors Ltd. v. Canada,
[1997] 2 S.C.R. 336, the Supreme Court of Canada stated that the initial onus
is on the taxpayer to demolish the assumptions relied on by the Minister in making
an assessment. In Amiante Spec Inc. v. Canada, 2009 FCA 139, at
paragraph 15, the Federal Court of Appeal established that this initial onus is
met where the taxpayer makes out at least a prima facie case that
demolishes the accuracy of the assumptions made in the assessment. The Federal
Court of Appeal explained the concept of a prima facie case as follows
at paragraphs 23 and 24:
23 A prima facie case is one
“supported by evidence which raises such a degree of probability in its favour
that it must be accepted if believed by the Court unless it is rebutted or the
contrary is proved. It may be contrasted with conclusive evidence which
excludes the possibility of the truth of any other conclusion than the one
established by that evidence” (Stewart v. Canada, [2000] T.C.J. No. 53,
paragraph 23).
24 Although it is not conclusive
evidence, “the burden of proof put on the taxpayer is not to be lightly,
capriciously or casually shifted”, considering that “[i]t is the taxpayer’s
business” (Orly Automobiles Inc. v. Canada, 2005 FCA 425, paragraph 20).
This Court stated that the taxpayer “knows how and why it is run in a
particular fashion rather than in some other ways. He [or she] knows and
possesses information that the Minister does not. He [or she] has information
within his [or her] reach and under his [or her] control” (ibid.).
[57]If the taxpayer meets the initial burden,
the onus shifts to the Minister to rebut the prima facie case made out
by the taxpayer, in order to prove his own assumptions.
[58]Thus, the initial burden of proof is on
the taxpayer because he knows his business and possesses information that the
Minister does not.
[59]In the instant case, the evidence does not
disclose that the appellant was aware of the fact that its two suppliers had
been disallowed 70% of their purchases by the Minister for the purposes of
their ITC claims. That was information that the Minister possessed and over
which the appellant had no control. In the circumstances, that fact should be
kept in mind when determining whether the appellant made out a prima facie
case demolishing the Minister's assumptions.
[60]That being said, is it possible to
conclude that the evidence adduced by the appellant creates such a degree of probability
in its favour that I must accept it if I believe it? Was that evidence
rebutted or the contrary proved?
[61]The Minister's first assumption is that
the invoices provided by the appellant are false and constitute accommodation
invoices. The Minister based that assumption on the fact that the two suppliers
did not have the staff or the equipment to supply so much jewellery, nor did
they purchase such a quantity of jewellery that they would have been able to
make the supplies that they had undertaken to make to the appellant.
[62]All of the appellant's witnesses described
the place of business of the two suppliers in question, which belonged to
Michel Henri. Mr. Henri's place of business was in Phillips Square, and the trustee in bankruptcy
confirmed that, when 4114299 Canada Inc. declared bankruptcy, there was
jewellery inventory worth $15 million in the vault of CIBC, as well as
equipment that was seized at that place of business. Thus, I find that the
appellant has prima facie demolished the Minister's assumption that the
two suppliers were unable to supply the jewellery to the appellant.
[63]To discharge her burden of demonstrating
that the invoices provided by the appellant were accommodation invoices, the
respondent sought to prove, through her auditors, that several of the suppliers
used by JemGold and 4119299 Canada Inc. did not exist or that they carried on
no commercial activity. In so doing, the respondent inferred that those
suppliers could not have supplied Michel Henri with the quantity that the
appellant claims to have purchased. The respondent added that a large
percentage of the appellant's purchases were from those two suppliers (JemGold
and 4119299 Canada Inc.).
[64]For its part, the appellant established,
through objective evidence, that its two suppliers, JemGold and later 4119299
Canada Inc., were indeed carrying on a commercial activity and, moreover, that
4119299 Canada Inc. had a very significant inventory of jewellery at the time
of its bankruptcy in 2007.
[65]The respondent also sought to cast doubt
on the appellant's credibility by arguing that about 35% of its annual sales
came from melting down jewellery it had bought.
[66]In my opinion, the respondent has not
proven on the balance of probabilities that the appellant did not purchase the
amount of jewellery that it claims to have purchased from the two suppliers in
question. The appellant filed in evidence its financial statements as well as
all of its bank statements and proofs of payment, and the respondent did not
adduce any tangible evidence that would enable me to conclude that the
appellant did not in reality disburse the amounts shown in exchange for the
jewellery purchased. There is no evidence that the cheques issued went through
cheque-cashing centres and that the funds came back to the appellant, as the
respondent seems to be claiming. That is very difficult for the respondent to
prove and, in this case, I am not able to say that the supplies of jewellery
were fictitious and that no payment was made in exchange.
[67]The respondent acknowledges that the
suppliers existed and that they carried on commercial activities. She does not,
however, acknowledge the quantity of jewellery bought as the two suppliers were
allegedly involved in fraudulent schemes with their own suppliers. The
respondent did not succeed in demonstrating that there was any kind of
collusion on the part of the appellant. The scheme the respondent is referring
to was uncovered through an investigation by the Canada Revenue Agency which
did not involve the appellant in any way. The evidence did not show that the
appellant was aware of the above-stated facts or that it acted in concert with
those involved in the scheme. Counsel for the respondent argued that the
invoice numbering was inconsistent. However, none of the numerous witnesses
were questioned about this and, in the circumstances, I find it impossible to
draw from that fact a negative inference in regard to the appellant.
[68]Moreover, the fact that a higher
percentage of jewellery was sold at a loss in one year as gold ingots may be
attribuable to the risk inherent in operating this type of business. I am
unable to conclude that this is evidence of participation in a fraudulent
scheme. In any case, the respondent was unable to establish a sufficient
connection to convince me otherwise.
[69]The other Minister's assumptions is that
the appellant did not provide supporting documentation that satisfied the
requirements of the ETA and the regulations thereunder. Subsection 169(4) of
the ETA reads as follows:
(4) Required documentation – A registrant may
not claim an input tax credit for a reporting period unless, before filing the
return in which the credit is claimed,
(a) the registrant has obtained
sufficient evidence in such form containing such information as will enable the
amount of the input tax credit to be determined, including any such information
as may be prescribed; and
(b)
where the credit is in respect of property or a service supplied to the
registrant in circumstances in which the registrant is required to report the tax
payable in respect of the supply in a return filed with the Minister under this
Part, the registrant has so reported the tax in a return filed under this Part.
[70]Section 3 of the Input Tax Credit
Information (GST/HST) Regulations (the Regulations) reads as follows:
3.
Prescribed
information — For the purposes
of paragraph 169(4)(a) of the Act, the following information is
prescribed information:
(a) where the total amount paid or
payable shown on the supporting documentation in respect of the supply or, if
the supporting documentation is in respect of more than one supply, the
supplies, is less than $30,
(i) the name of the supplier or the intermediary
in respect of the supply, or the name under which the supplier or the
intermediary does business,
(ii) where an invoice is issued in respect of
the supply or the supplies, the date of the invoice,
(iii) where an invoice is not issued in respect
of the supply or the supplies, the date on which there is tax paid or payable
in respect thereof, and
(iv) the total amount paid or payable for all
of the supplies;
(b) where the total amount paid or
payable shown on the supporting documentation in respect of the supply or, if
the supporting documentation is in respect of more than one supply, the
supplies, is $30 or more and less than $150,
(i) the name of the supplier or the intermediary
in respect of the supply, or the name under which the supplier or the
intermediary does business, and the registration number assigned under
subsection 241(1) of the Act to the supplier or the intermediary, as the case
may be,
(ii) the information set out in subparagraphs (a)(ii)
to (iv),
(iii) where the amount paid or payable for the
supply or the supplies does not include the amount of tax paid or payable in
respect thereof,
(A) the amount of tax paid or payable in respect
of each supply or in respect of all of the supplies, or
(B) where provincial sales tax is payable in
respect of each taxable supply that is not a zero-rated supply and is not
payable in respect of any exempt supply or zero-rated supply,
(I) the total of the tax paid or payable under
Division II of Part IX of the Act and the provincial sales tax paid or payable
in respect of each taxable supply, and a statement to the effect that the total
in respect of each taxable supply includes the tax paid or payable under that
Division, or
(II) the total of the tax paid or payable under
Division II of Part IX of the Act and the provincial sales tax paid or payable
in respect of all taxable supplies, and a statement to the effect that the
total includes the tax paid or payable under that Division,
(iv) where the amount paid or payable for the
supply or the supplies includes the amount of tax paid or payable in respect
thereof and one or more supplies are taxable supplies that are not zero-rated
supplies,
(A) a statement to the effect that tax is
included in the amount paid or payable for each taxable supply,
(B) the total (referred to in this paragraph as
the “total tax rate”) of the rates at which tax was paid or payable in respect of
each of the taxable supplies that is not a zero-rated supply, and
(C) the amount paid or payable for each such
supply or the total amount paid or payable for all such supplies to which the
same total tax rate applies, and
(v) where the status of two or more supplies is
different, an indication of the status of each taxable supply that is not a
zero-rated supply; and
(c) where the total amount paid or
payable shown on the supporting documentation in respect of the supply or, if
the supporting documentation is in respect of more than one supply, the
supplies, is $150 or more,
(i) the information set out in paragraphs (a)
and (b),
(ii) the recipient’s name, the name under which
the recipient does business or the name of the recipient’s duly authorized
agent or representative,
(iii) the terms of payment, and
(iv) a description of each supply sufficient
to identify it. [Emphasis added.]
[71]The invoices provided by the appellant
establish the name of the recipient and the supplier, the supplier’s registration
number, the date, and the total amount paid, and provide the general
description "assorted gold jewellery". The Regulations state that the
description must be sufficient to identify each supply. The Minister indicated
in his assumptions that the description was not sufficient in that it contained
neither the quantity or quality of jewellery supplied nor the consideration
required for each item.
[72]All three witnesses subpoenaed by the
appellant who were completely unrelated to it, namely David Malka,
Ani Hovanessian and Kevin Klieman, said they had bought jewellery
from Michel Henri, and they provided invoices that were identical or
almost identical to those provided by the appellant. The respondent did not
question those witnesses about the descriptions on those invoices. Nor did the
respondent dispute the testimony of those three witnesses or challenge their
credibility.
[73]Furthermore, evidence was led that the
invoices issued for the jewellery purchases made abroad are more detailed in
that they specify, in some cases, the weight, in other cases, the quantity, and
in still others, both, as well as giving a sometimes summary description of the
products purchased. Also shown, in some instances, is the price of gold or
labour, and in other cases, the unit price (see Exhibits A‑7, I‑1,
I‑2 and I‑3).
[74]The testimony disclosed that there is a
difference between invoicing for imported products and invoicing for jewellery
purchased locally. Although there is a paucity of evidence on this point, it is
my understanding that providing on each invoice a detailed description of every
item of jewellery purchased would be far too tedious.
[75]The Regulations require a description of
each supply sufficient to identify it. The respondent argued that to meet this
requirement the invoice must show the quantity and quality of the jewellery
supplied and the consideration for each item. The respondent did not, however,
explain the basis for the requirements so identified by her.
[76]I conclude from the testimony that the
supporting documentation produced as evidence is not abnormal in the industry. However,
the description of the products purchased is clearly inconsistent with the requirements
stated by the respondent in her assumptions of fact. So the question that must
be answered is the following: what is the meaning of the requirement in the Regulations
that the information in the supporting documentation must include a description
of each supply sufficient to identify it? The Regulations make no mention of
the requirements that must be met according to the respondent. They speak of a
description of each supply sufficient to identify it. What is the meaning of
"each supply"? In the present case, can it be said that each item of
jewellery is a supply, or is it each lot of jewellery that constitutes a supply?
In the former case, the supporting documentation would be insufficient; in the
latter, it might be sufficient. The parties did not place any emphasis on this
point.
[77]In view of the scanty evidence presented
to me in this regard and the rather vague terms used in the Regulations, and
given my conclusion that the respondent has not established the existence of
accommodation invoices, I consider the invoices submitted to be in conformity
with the Regulations. If, in the respondent's view, standard business practice
in the industry does not meet the requirements of the Regulations, it is
incumbent on the respondent to demonstrate more clearly that the requirements
stated by her are those laid down in the Regulations. In the present case, my
opinion is that the appellant has shown on the balance of probabilities that
the invoices submitted do meet the requirements of section 3 of the
Regulations.
[78]For these reasons, I would allow the
appeal and refer the assessment back to the Minister for reconsideration and
reassessment on the basis that the appellant is entitled to $2,303,351.63 in
ITCs in respect of supplies of jewellery received from JemGold and
4114299 Canada Inc. during the periods at issue. The penalties and
interest assessed under section 280 of the ETA are cancelled accordingly.
The penalty assessed under section 285 of the ETA is cancelled.
[79]The appellant is entitled to
costs under Tariff B of the Tax Court of Canada Rules (General Procedure).
Signed
at Ottawa, Canada, this 2nd day of December 2010.
"Lucie Lamarre"
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