Ruest v. The Queen, docket 97-147(GST)I (Informal Procedure)

[OFFICIAL ENGLISH TRANSLATION]

97-147(GST)I

BETWEEN:

CLAUDETTE RUEST,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on common evidence with the appeals of Gestion 69692 Inc. (97-141(GST)I), Gestion 69691 Inc. (97-146(GST)I) and Club Immobilier International Inc. (97-148(GST)I), on January 28, 29 and 30, 1998,

at Montréal, Quebec, by

the Honourable Judge Alain Tardif

Appearances

Agent for the Appellant:             Marcel Thiffault

Counsel for the Respondent:      Maryse Lord

JUDGMENT

          The appeal from the assessment made under paragraph 296(1)(b) of the Excise Tax Act, the notice of which is dated October 10, 1995 and bears number 22241, is dismissed and the assessment is confirmed in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 11th day of September 1998.

"Alain Tardif"

J.T.C.C.

Translation certified true

on this 30th day of June 2003.

Erich Klein, Revisor

[OFFICIAL ENGLISH TRANSLATION]

Date: 19980911

Docket: 97-147(GST)I

BETWEEN:

CLAUDETTE RUEST,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Tardif, J.T.C.C.

[1]            The appellant appealed by means of a Notice of Appeal reading as follows:

[TRANSLATION]

NOTICE OF APPEAL

The appellant is appealing the respondent's decision dated October 24, 1996, to confirm the assessment made on October 10, 1995, for the period from January 1, 1991, to September 30, 1994.

1.          On October 10, 1995, the respondent issued under the Excise Tax Act a notice of assessment numbered 22241 for the period from January 1, 1991, to September 30, 1994;

2.          The appellant filed a notice of objection to the assessment referred to in the preceding paragraph;

3.          In a decision made on October 24, 1996, the respondent confirmed notice of assessment number 22241 issued under the Excise Tax Act;

4.          The appellant is appealing the decision of the Minister of Revenue confirming assessment number 22241;

5.          Following an audit, the respondent made the following adjustments:

                GOODS AND SERVICES TAX                                       $12,633.67

                INPUT TAX CREDIT                                               $ 2,069.99

6.          The respondent claims, inter alia, that the appellant failed to collect and/or remit the tax on income from laundry rooms operated at 476 Rue Saint-Jean and 2145 Boulevard St-Joseph in Drummondville;

7.          The assessments made by the respondent under the Excise Tax Act are incorrect because the auditor from the Department of Revenue overestimated the income earned from the operation of the washers and dryers;

8.          The Department's auditor also failed to take account of the fact that the premises are lit 24 hours a day, that a fan operates continuously and that the central heating is on six months a year;

9.          Following an audit, the respondent made adjustments that led to notice of assessment number 22241 issued under the Excise Tax Act and through which the respondent is claiming $20,435.36;

10.        The respondent argues that the automobile sales business operated by the appellant was not a commercial activity within the meaning of the Excise Tax Act because it was carried on without a reasonable expectation of profit;

11.        The appellant invested substantial amounts to purchase cars at auctions, and those investments were made for the purpose of deriving an economic benefit therefrom;

12.        In the circumstances, the appellant was entitled to claim input tax rebates with respect to her business, and thus the rebates claimed by the taxpayer should have been granted;

13.        The respondent also claims that the appellant failed to remit the goods and services tax on income generated by the operation of laundry rooms, a discotheque and immovable properties (rent);

14.        The assessments made by the respondent under the Excise Tax Act are incorrect because the Department's auditor overestimated the income earned from the operation of the washers without taking account of industry standards concerning the ratio between income from washers and income from dryers and, furthermore, without considering the fact that the users of the machines are from a disadvantaged background;

15.        The appellant ran a discotheque and bar on Rue Saint-Jean in Drummondville, and all of the expenses associated with those activities are eligible for input tax rebates;

16.        The appellant gave the respondent all the invoices with respect to which she claimed input tax rebates, and all of those invoices are from the taxpayer's commercial activities;

17.        At all relevant times, the appellant complied with the provisions of the Excise Tax Act as regards the documentary requirements provided for by law;

18.        This appeal is well founded in fact and in law;

FOR THESE REASONS, MAY IT PLEASE THE COURT:

            TO ALLOW this appeal;

TO VACATE notice of assessment number 22241 issued under the Excise Tax Act on October 10, 1995;

TO REFER the entire matter back to the respondent so that she can issue a notice of reassessment in accordance with the judgment to be made in this case;

            THE WHOLE with costs.

                                                MONTRÉAL, January 20, 1997

                                                                                          

                                                NORMAND BÉRUBÉ

                                                10422 Rue de Martigny

                                                Montréal, Quebec H2B 2M6

                                                Tel.: (514) 389-6339

                                                Counsel for the Appellant

[2]      The respondent justified and supported her assessment with the following facts alleged in paragraph 13 of the Reply to the Notice of Appeal:

                [TRANSLATION]

(a)         the appellant is a goods and services tax registrant;

(b)         during the period at issue, the appellant carried on the following activities:

-         operation of a laundry room at 2145 St-Joseph in Drummondville;

-         operation of a laundry room at 476 St-Jean in Drummondville from March 1, 1992, until June 30, 1994, the date on which the immovable property was sold and Gestion 69691 Inc. began operating the laundry room;

-         rental of business premises in the immovable properties located at 466-480 St-Jean;

-         sale of used motor vehicles;

-         rental of residential and business premises in the immovable properties located at 586-590 St-Jean and 100 des Merisiers in Drummondville;

-         washer and dryer services provided to tenants in the properties located at 586-590 St-Jean (16 apartments) and 100 des Merisiers (36 apartments);

-            discotheque and bar located at 466 St-Jean;

(c)         all of those activities were managed by Marcel Thiffault, the appellant's spouse;

(d)         during the same period, Marcel Thiffault also ran three other corporations, namely Club Immobilier International Inc. and Gestion 69692 Inc., of both of which he is the president and shareholder, and Gestion 69691 Inc., the president and shareholder of which is Claudette Ruest, the appellant herein;

(e)         during the period at issue, Marcel Thiffault used just one bank account for all the activities of the appellant, for the activities of the three companies referred to in subparagraph (d), and also for the payment of his personal expenses;

(f)          the accountant prepared the appellant's quarterly returns on the basis of the cheques issued, but without having the purchase and sales invoices in his possession;

(g)         moreover, since the accountant did not have in hand the contracts of sale, the rental agreements or the invoices, income was reported on the basis of the deposits and adjusted at the end of the year when those documents were provided to him;

(h)         the income also had to be adjusted at the end of the year to take account of amounts that had not been deposited in the account, and it then had to be broken down for each registrant and each activity on the basis of the information provided by Marcel Thiffault;

(i)          thus, the amounts collected as residential rents could not be traced in the deposits, and the respondent was unable to confirm that the income reported for the residential rentals was indeed from those rentals or from the laundry rooms made available to tenants;

(j)          it can be seen from the foregoing that the appellant's accounting was deficient, since the books of account were inadequate in some cases and non-existent in others, that the income was not all reported, that some invoices needed in order to justify the ITCs claimed were missing, that the ITCs were claimed without taking account of which registrant the invoices had been issued to and that ITCs were claimed for non-taxable activities or were claimed twice;

(k)         the entries made in the appellant's general ledger were therefore not consistent with the purchase and sales invoices;

(l)          the respondent estimated the annual income from the laundry rooms operated at 2145 St-Joseph and 476 St-Jean as follows:

-            she began by establishing electricity and natural gas consumption for each laundry room, taking account of the fact that, according to the findings made on site, the main light was switched off when the laundry rooms were not open, with only a few fluorescent lights remaining on, the fan was not running 24 hours a day but rather 4 hours a day on 182 days of the year and the heating period was also 182 days a year;

-            based on that consumption and the number of kilowatts needed to operate the washers and dryers, she calculated in hours per day the amount of time a washer and a dryer were used;

-            she then estimated the income from the laundry rooms by taking account of the number of washers and dryers in each and of the price set by the appellant for users;

-            finally, she established the annual income from the laundry rooms based on the washers being used between 0.9638 and 1.7024 hours a day and the dryers between .3077 and 1.1635 hours a day, depending on the year and the laundry room concerned;

-            the income from the laundry rooms was thus determined to be the following:

	1991	1992	1993	1994	TOTAL
Reported income	12,027	17,523	783	- 0 -	30,333
Adjusted income	20,508	31,052	38,581	29,946	120,087

a breakdown of the income and of the GST to be remitted by reporting period being contained in Schedule B appended to this Reply;

(m)        the respondent considered that the activities involving the sale of used motor vehicles were not commercial activities within the meaning of section 123 of the Excise Tax Act (hereinafter the "E.T.A.") because most of the vehicles were sold below cost and these activities had generated losses for the past five years; moreover, some of the cars were registered in the appellant's name and used for personal purposes; the activities therefore involved no reasonable expectation of profit;

(n)         accordingly, and since the appellant had collected and remitted GST on those supplies, the respondent granted the requested ITCs only to the amount of GST so remitted and denied the rest;

(o)         the respondent established the income from the commercial premises in the properties located at 466-480 St-Jean on the basis of the leases provided by the appellant; as regards the rent for the tavern, however, it was determined using the amounts reported by the appellant in the reconciliation of her rental income;

(p)         the appellant failed to collect and remit the GST payable on that rent, and the respondent therefore assessed her for $4,797.65 in 1992, $6,273.20 in 1993 and $3,086.09 in 1994;

(q)         the income from the laundry rooms located in the residential buildings at 586-590 St-Jean and 100 des Merisiers was established as follows:

-            for 586-590 St-Jean, in which there are 16 apartments, the respondent accepted the figure referred to in the 1987 purchase contract, namely $100 a month;

-            for 100 des Merisiers, the respondent estimated the income at $200 a month because there are 36 apartments in that building, or a little more than twice the number at 586-590 St-Jean;

(r)         the amount of GST that the appellant failed to remit on the income from those two laundry rooms was thus determined to be $218.08 for each of 1991, 1992 and 1993 and $103.37 for 1994, the property at 100 des Merisiers having been sold on May 1, 1994;

(s)         with regard to the GST amounts that the appellant failed to collect on the income from the operation of the discotheque and bar, the respondent notes that they are not at issue herein since they were determined using data provided by the appellant;

(t)          finally, after a review of all the invoices submitted by the appellant, a net total of $2,069.99 in ITCs was denied in respect of the whole of the appellant's activities for the following reasons:

            -            some purchase invoices were missing;

-           some amounts were claimed twice, that is, by both the appellant and one of the three corporations managed by Marcel Thiffault;

-            some purchases were not eligible-inter alia because they were personal in nature or concerned property that had not been acquired in the course of commercial activities-and therefore gave no entitlement to ITCs;

-            the sale of used vehicles involved no reasonable expectation of profit, was not a commercial activity and therefore gave no entitlement to ITCs;

[3]      The appellant carried on a number of commercial activities. Her spouse, Marcel Thiffault, took on the management of all of those activities and this emerged very clearly from the evidence.

[4]      Since the testimony of the principal witnesses related to the whole of the commercial activities of the appellants in Gestion 69692 Inc. (97-141(GST)I), Gestion 69691 Inc. (97-146(GST)I) and Club Immobilier International Inc. (97-148(GST)I), I am appending the decision in Club Immobilier International Inc. (97-148(GST)I) to this judgment.

[5]      I will not repeat my assessment of all the evidence adduced by the appellant's witnesses. I will basically confine myself to saying that that evidence is totally deficient and does not in any way cast doubt on the validity of the assessments, which resulted from serious audits in which the work methods used were, in the circumstances, reasonable and appropriate.

[6]      However, I will take the liberty of making some specific comments about the activities having to do, in particular, with the sale of used vehicles, the operation of a laundry room, the washer and dryer services and the rental of residential and business premises.

[7]      First of all, I consider it helpful and important to reproduce the table concerning the motor vehicle transactions:

[TRANSLATION]

Date 1997.10.16

QST Number:

GST Number:

                Subject: Various                    Point to be verified: 01 Various                           (1)

                                                                                AUTO PURCHASE AND SALE COMPARE                       Page 2 of 2

Comparison of automobile purchase and sale prices

Purchase                                         Serial no.             Model Purchase                             Sale                                                Sale                                 Difference

date                                                                             amount                amount                        date

1988.03.21       f0346631                  Camry 85                7300.00                1000.00                 1991.11.21                                 -6300.00

1988.03.21       HZ041787               Nova 87                                             2000.00                 1992.04.13                                        0.00

1991.05.14       AEG25707               Eldor 80                                              2100.00                 1991.05.14                                        0.00

1991.05.14       2BEJ2816                Econo 79                1028.00                  600.00       *         1991.10.08                                   -428.00

1991.06.19       7561C787                Boat 87                 12000.00

1991.08.21       L1318H10                TRL 87

1991.09.09       B1428304                Malib 81                                               375.00                 1991.09.09 archived                        0.00

1991.10.02       2A822352                Conti 78                                               300.00                 1991.10.02                                        0.00

1991.10.02       12035666                 Merce 75                3165.00                  250.00                 1993.08.25 accident                 -2915.00

                                                                                                                                                                                                         0.00

1991.10.16       H9697399                BMW 325 87       11000.00             10000.00        1992.04.21                                         -1000.00

1992.06.09       JC479263                 Jaguar 88             16100.00

1992.03.31       JR561491                 Voyag 88               6135.00       *        4000.00                 1992.03.31                                 -2135.00

1992.03.31       CC802181               Prelu 82                                                500.00                 1992.06.30 archived                        0.00

                                                        Honda 81                                             500.00                                                                          0.00

                                                                                                                                                                                                         0.00

                                                                                                                                                                                                         0.00

1992.06.05       H9697399                BMW 325 87                                                                  1992.06.05                                        0.00

                                                                                                                                                                                                         0.00

                                                                                                                                                                                                         0.00

1992.12.30       H9697399                BMW 325 87                                                                                                                           0.00

1993.04.06       JR504172                 Dodge Car             4150.00                5000.00                 1993.05.31                                   -850.00

                                                                                                                                                                                                         0.00

1993.09.03       Me003663               Volk Passa           11400.00            

1993.09.28       12035666                 Merce 75                                                                         1993.09.28                                        0.00

1993.09.15       Ga001255                Yamaha 86             1892.00                  700.00                 1994.07.04 accident                 -1192.00

1993.11.05       M0015379               Tercel 91                4575.00                2500.00                 1994.06.01                                 -2075.00

1993.11.05       LX123007                Chrys TWC 90                                  6500.00                 1993.11.05                                        0.00

1993.11.05       2A822352                Conti 78                                                                                                                                   0.00

1993.11.09       J0152898                 Camry 88                7035.00                6800.00                 1993.11.15                                    235.00

1993.11.12       HM22570401          DSM Cala                934.60                1100.00                 1993.11.12                                   -165.40

1993.11.26       GR772148                Carav 86                 2165.00                2500.00                 1993.11.24                                   -335.00

1994.08.26       J0159877                 Tercel 88                2515.00                2500.00                 1994.08.26                                      15.00

1993.10.27       FR294476                Dodge Ram           1560.00

1993.10.27       KZA23203              Aerostar X            5780.00

1994.05.06       GC625686                Ponti Gran             9000.00                  250.00                 1994.05.06                                 -8750.00

                                                                                                                                                                                                         0.00

1989.11.30       2S752761                 Conti 79

                                                                                                                                                                                                              

                                                                                   107734.60              49475.00                                                             23694.60

Grand Am 29-03-88 purchase

[8]      A number of findings emerge from this table:

·      the data and information are often incomplete

·      there was a definite interest in luxury cars

·      the cars remained in stock for very long periods

·      few cars were bought and sold during the period analysed

·      substantial, systematic losses were incurred on the transactions

[9]      The explanations given for a few of the losses were implausible and totally outlandish. This was one aspect of the case where the appellant could have adduced evidence to rebut the presumptions resulting from the above table. Not only was such evidence not adduced, but the appellant basically argued that some vehicles had been involved in traffic accidents and that the automobile market was difficult. I am convinced rather that most of the vehicles described above were regularly used by members of the Thiffault family.

[10]     Moreover, the setting up of that economic activity was no doubt dictated by a desire to reduce the cost of the Thiffault family's use of the many vehicles as much as possible.

[11]     The evidence adduced never showed that the activity was structured, supervised and autonomous.

[12]     Did the used car business have any salespersons?

[13]     Did it have any mechanical or clerical support staff? Where was the place of business, and how was it set up? Had all the permits needed for such an activity been issued and renewed?

[14]     Were there promotional materials, such as business cards, key rings, stickers, etc.? Was there an advertisement in the Yellow Pages, was there yearly or monthly flighting, and were subscriptions to trade journals taken out?

[15]     The evidence showed absolutely nothing in this regard; what is more, the incomplete explanations provided were irrelevant and utterly outlandish. This aspect of the case clearly illustrates the degree to which Charles Thiffault failed to understand the nature of the burden of proof that rests on an appellant.

[16]     The objective being pursued was obviously not viability or profitability. The cars remained in stock for such long periods that only personal use could justify, explain or legitimize such an activity.

[17]     The cars were usually sold at a loss, as if there were some benefit to doing so; moreover, the losses were often substantial.

[18]     In evidentiary matters, figures are generally meaningful as revealing the intentions of those who control them; in other words, figures provide information that makes it possible to better understand and assess the true intention of those carrying on the activities that generate the figures. In the instant case, it does seem that making the operations profitable and viable was not the main objective being pursued. In any event, the many and substantial losses incurred, the small number of transactions during the period and the length of time the vehicles remained in the appellant's possession have convinced me that it was not. I therefore have no hesitation in concluding that the appellant was engaged not in a commercial activity but basically in a private undertaking camouflaged and disguised as a commercial operation.

[19]     As for the income from the other sources, the Department established it on the basis of certain standards, statistics and information found on the descriptions of the immovable properties that had been prepared for potential purchasers.

[20]     It is quite clear that this was not the ideal way to determine income from economic activities, the best way being, of course, a daily operational report supplemented by adequate accounting so that all income and expenses can be quickly identified; such accounting should also have been supported and corroborated by all the relevant invoices and vouchers.

[21]     Nothing of the sort existed here. Income was received but not deposited and was used to pay certain expenses in cash. According to Mr. Thiffault, business was not profitable, and income was considerably lower than that established by the respondent.

[22]     What was that income? The evidence never showed this. Yet the appellant would like her appeal to be allowed. Does she think that this Court is omniscient or has a divine ability to determine what her income was?

[23]     First of all, I have neither that power nor that ability; in addition, it is not for the Court to substitute itself for appellants and to redo the accounting for which they alone were responsible. That is a legal obligation, and failure to comply with it may result in the taxpayer who is at fault being penalized when the time comes to precisely demonstrate the nature of the taxpayer's financial obligations toward the government, of which the taxpayer is the agent; in that regard, Parliament has imposed on the taxpayer strict obligations to ensure accessible, informed accounting.

[24]     The method or procedures used by the Department, although imperfect, were fully justified given the fact that there was little or no information available. The appellant never showed that the exercise in question was unreasonable or improper. On the contrary, the complaints and criticisms enabled the respondent to show convincingly that the process chosen and used was fair, rational and acceptable and that it led to plausible results that were certainly more reliable than those suggested by the appellant. I have no reason to discount or exclude the results obtained, which served as the basis for the assessment.

[25]     In such matters, the burden of proof is on the person challenging the validity of the assessment, which generally results from an audit followed by discussions and negotiations.

[26]     In other words, if the appellant does not prove that the assessment, which is presumed valid, is incorrect, the Court must simply confirm it. The appellant must prove this on a balance of evidence; thus, proof beyond a reasonable doubt is not necessary. However, it is essential that the balance of probabilities support the arguments underlying the appeal.

[27]     Such proof generally requires the involvement of witnesses whose testimony is supplemented and confirmed by adequate documentary evidence. It may sometimes be helpful to call one or more experts. The evidence must be coherent, clear and above all credible and plausible.

[28]     In the instant case, the appellant's evidence was totally deficient and without foundation; she chose to focus her energies on discrediting the respondent's work. She forgot that she was legally obliged to have, at all times, records supplemented by the appropriate documentation allowing the quality of her administration as a fiduciary of the government to be established and defined.

[29]     That obligation results from section 286 of the Act, which reads as follows:

            286(1) Keeping books and records Every person who carries on a business or is engaged in a commercial activity in Canada, every person who is required under this Part to file a return and every person who makes an application for a rebate or refund shall keep records in English or in French in Canada, or at such other place and on such terms and conditions as the Minister may specify in writing, in such form and containing such information as will enable the determination of the person's liabilities and obligations under this Part or the amount of any rebate or refund to which the person is entitled.

            (2)         Inadequate records    Where a person fails to keep adequate records for the purposes of this Part, the Minister may require the person to keep such records as the Minister may specify and the person shall thereafter keep the records so specified.

            (3)         Period for retention Every person required under this section to keep records shall retain them until the expiration of six years after the end of the year to which they relate or for such other period as may be prescribed.

            (4)         Objection or appeal Where a person who is required under this section to keep records serves a notice of objection or is a party to an appeal or reference under this Part, the person shall retain, until the objection, appeal or reference and any appeal therefrom is finally disposed of, every record that pertains to the subject-matter of the objection, appeal or reference.

            (5)         Demand by Minister Where the Minister is of the opinion that it is necessary for the administration of this Part, the Minister may, by a demand served personally or by registered or certified mail, require any person required under this section to keep records to retain those records for such period as is specified in the demand.

            (6)         Permission for earlier disposal    A person who is required under this section to keep records may dispose of the records before the expiration of the period in respect of which the records are required to be kept if written permission for their disposal is given by the Minister.

[30]     It may seem excessive for such a burden to be imposed on some taxpayers, but it can be explained and justified by the fact that our society puts its trust in its citizens, who must self-assess. Persons with such a responsibility have to understand that they are important players who are directly involved in good government management. In this regard, they are obliged to have, at all times, accounting that is clear, precise, detailed and complete so as to make it possible to verify whether their obligations have been properly fulfilled.

[31]     Here, the appellant completely failed to fulfil her obligations and must therefore take the consequences of her gross negligence.

[32]     For all these reasons, and also for the reasons given in Club Immobilier International Inc. (97-148(GST)I) (a copy of which is appended to this judgment) in so far as they are applicable herein, I dismiss the appellant's appeal and confirm that the assessment is valid, the whole with costs if applicable.

Signed at Ottawa, Canada, this 11th day of September 1998.

"Alain Tardif"

J.T.C.C.

Translation certified true

on this 30th day of June 2003.

Erich Klein, Revisor