Gestion 69691 Inc. v. The Queen, docket 97-146(GST)I (Informal Procedure)

[OFFICIAL ENGLISH TRANSLATION]

97-146(GST)I

BETWEEN:

GESTION 69691 INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on common evidence with the appeals of Gestion 69692 Inc. (97-141(GST)I), Claudette Ruest (97-147(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 subsection 296(1)(b) of the Excise Tax Act, notice of which is dated September 25, 1995, and bears number 22213, 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 20th day of June 2003.

Sophie Debbané, Revisor

[OFFICIAL ENGLISH TRANSLATION]

Date: 19980911

Docket: 97-146(GST)I

BETWEEN:

GESTION 69691 INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Tardif, J.T.C.C.

[1]      The appellant has 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, confirming the assessment made on September 25, 1995, for the period from January 1, 1991, to August 31, 1994.

1.          On September 25, 1995, the respondent issued a notice of assessment numbered 22213 under the Excise Tax Act for the period from January 1, 1991, to October 31, 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 22213 issued under the Excise Tax Act;

4.          The appellant is appealing the decision of the Minister of Revenue confirming assessment number 22213;

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

                GOODS AND SERVICES TAX                                       $52,329.87

                INPUT TAX CREDIT                                               ($34,407.30)

6.          The respondent claims, inter alia, that the appellant failed to apply the self-supply rule when it rented a condominium located at 991 Terrasse des Promenades;

7.          The assessment made by the respondent concerning the condominium located at 991 Terrasse des Promenades is incorrect because possession of the condominium was not given under a lease-only temporary lodging was provided;

8.          The respondent also claims that the appellant failed to remit the goods and services tax on income generated by the operation of laundry rooms; moreover, the auditor adjusted the commercial rent by wrongly taking into account the percentage increase referred to in the leases;

9.          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 washer and dryer income or the fact that the users of the machines are from a disadvantaged environment;

10.        The appellant provided the respondent with all the invoices for which it claimed input tax rebates, and all of those invoices result from the registrant's commercial activities;

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

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

FOR THESE REASONS, MAY IT PLEASE THE COURT:

            TO ALLOW this appeal;

TO SET ASIDE notice of assessment number 22213 issued under the Excise Tax Act on September 25, 1995;

TO REFER the entire matter back to the respondent in order that she 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 defended the soundness of the assessment by means of the Reply to the Notice of Appeal, which reads as follows:

[TRANSLATION]

REPLY TO THE NOTICE OF APPEAL

In reply to the Notice of Appeal sent to the respondent on January 29, 1997, concerning the notice of assessment numbered 22213 and dated September 25, 1995, which was issued for the period from January 1, 1991, to October 31, 1994, the Deputy Attorney General of Canada states as follows on behalf of the respondent, Her Majesty the Queen:

A.         STATEMENT OF FACTS

1.          He admits the facts alleged in paragraphs 1, 2 and 3 of the Notice of Appeal without, however, admitting anything regarding the content of the notice of objection;

2.          He takes note of paragraph 4 of the Notice of Appeal;

3.          He admits the facts alleged in paragraphs 5 and 6 of the Notice of Appeal;

4.          He denies the facts alleged in paragraph 7 of the Notice of Appeal;

5.          With regard to paragraph 8 of the Notice of Appeal, he admits that he assessed the goods and services tax that the appellant failed to remit on taxable supplies made in laundry rooms operated by the appellant, and he denies the rest of the said paragraph 8;

6.          He denies the facts alleged in paragraphs 9, 10, 11 and 12 of the Notice of Appeal;

7.          On September 25, 1995, by notice of assessment number 22213, the appellant was assessed for $23,736.67, which represented a penalty, interest and the net tax that it had failed to collect or remit on taxable supplies made during the period from January 1, 1991, to October 31, 1994:

            GST:                                         $52,329.87

            Additional ITCs:                        ($34,407.30)

            Penalty:                                        $2,892.12

            Interest:                                         $2,921.98

                        TOTAL                        $23,736.67

a breakdown of the assessed amounts by reporting period being appended to Schedule A of this Reply;

8.          The appellant objected to notice of assessment number 22213 by a notice of objection dated November 16, 1995;

9.          On October 24, 1996, the Minister notified the appellant of his decision to confirm notice of assessment number 22213;

10         On January 21, 1997, the appellant filed a Notice of Appeal from assessment number 22213 with the Registry of this Court;

11.        In making the said assessment, the Minister relied on the following facts discovered during the audit carried out in 1994 and 1995:

(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 476 St-Jean in Drummondville as of June 30, 1994, the date on which the immovable property was purchased and the laundry rooms operated by the appellant;

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

-            construction and sale of residential condominiums;

-            rental of a condominium for residential purposes;

(c)         all of those activities were managed by Marcel Thiffault, Claudette Ruest's spouse who is the appellant's president and shareholder;

(d)         during the same period, Marcel Thiffault also managed two other corporations-Club Immobilier International Inc. and Gestion 69692 Inc.-of which he is the president and shareholder, and he handled the many commercial activities carried on by Claudette Ruest, who owned rental buildings and businesses;

(e)         during the period at issue, Marcel Thiffault used just one bank account for all the activities of the four registrants (the appellant, the two companies referred to in subparagraph (d) and Claudette Ruest), an account that was also used to pay Mr. Thiffault's personal expenses;

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

(g)         moreover, since the accountant did not have the sales contracts, the rental agreements, or the invoices in his possession, income was reported on the basis of 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 income that had not been deposited in the account, and it then had to be broken down for each activity and each of the four registrants 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 such residential rentals was indeed from those rentals or from the laundry rooms made available to tenants;

(j)          it results from the foregoing that the appellant's accounting was deficient, since the books of account were inadequate or non-existent, that the income was not all reported, 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 room operated at 476 St-Jean as follows:

-            first the electricity and natural gas consumption for the laundry room was established, taking account of the fact that, according to the findings made on site, the main light was switched off when the laundry room was not open, with only a few fluorescent lights switched on, the fan did not operate 24 hours a day but rather 4 hours a day for 182 days of the year, and the heating system also operated 182 days a year;

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

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

-            finally, the annual income from the laundry room was established on the basis of 1.5424 hours a day of washer use and.4046 hours a day of dryer use;

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

                                                                                    1994

                                    Reported income:                            $0.00

                                    Adjusted income:                       $6,631.43

                                    Difference:                                 $6,631.43

(m)        the disputed notice of assessment was therefore issued concerning the amount of GST that the applicant failed to remit on those taxable supplies of $6,965.69, that is, $279.47;

(n)         the respondent established the income from the commercial dwellings located within the properties at 466-480 St-Jean on the basis of the leases provided by the appellant, aside from the rent for the tavern, which was determined using the amounts reported by the appellant during the reconciliation of its rental income;

(o)         the appellant failed to collect and remit all of the GST payable on that rent, and the respondent therefore assessed it for $682.67 in 1994;

(p)         the appellant also rented a condominium-a residential rental that included an option to purchase-located at 991 Terrasse des Promenades in Drummondville, which it had built;

(q)         the fair market value of that condominium was $40,000.00, taxes included;

(r)         the amount of GST that the appellant failed to remit on that supply, which is deemed to have been made to itself, is therefore $2,457.11;

(s)         under the Act, the appellant is deemed to have made a self-supply;

(t)         finally, after reviewing all the invoices submitted by the appellant, a total of $3,958.93 in ITCs were denied for the following reasons:

-         some purchase invoices were missing;

-         some amounts were claimed twice, that is, by both the appellant and one of the other three registrants whose activities were also managed by Marcel Thiffault;

-         some purchases were not eligible, inter alia, because they were personal in nature or they concerned property that had not been acquired in the course of commercial activities, and therefore did not entitle the appellant to ITCs;

however, the respondent allowed a net total of $34,407.30 in additional ITCs;

B.         ISSUE TO BE DECIDED

12.        The issue is whether the appellant owes the $17,922.57 that was assessed as unremitted net tax (not including penalty and interest);

[3]      As in the other cases, the appellant did not adduce any valid evidence to show that its arguments were soundly based. It basically criticized, blamed and reproached the respondent for the arbitrary method used to make the assessment.

[4]      It is true that the respondent had to use certain procedures that could have led to one or more conclusions lacking the absolute rigour that results from an audit in which all of the appropriate documentation is available. The appellant could not reproach the respondent for failing to consider the real figures and the real information since the respondent simply did not have them; if they were available, this has not been proved.

[5]      How can this Court determine the exact amount of an assessment in the absence of thorough evidence from which intelligent conclusions may be drawn?

[6]      At the outset of the hearings and a number of times thereafter, I said that it was absolutely necessary for the appellant to prove the soundness of its arguments and that it could not discharge the burden of proof it had by making vague criticisms that were often directed against the auditors personally.

[7]      How could I decide that the assessment is unjustified in whole or in part without a modicum of evidence showing that the audit was marred by gross negligence or bad faith?

[8]      The evidence clearly showed that the appellant was not very co-operative or was even aggressive toward those responsible for the audit. Moreover, the appellant did not have the appropriate documentary information or, if it did, did not use that information to support the validity of its arguments.

[9]      In such circumstances, as I said during the hearings, I have no choice but to accept the respondent's conclusions. For me to do otherwise, the appellant would have been required to show on a balance of evidence that the procedure the respondent used to make the assessment was biased but, also and above all, to show that it had in its possession all the information and documentation needed to make an assessment other than the one in dispute.

[10]     Not only did the evidence fail to show that the respondent acted in bad faith, but the weight of the evidence clearly established that the respondent used reasonable and credible procedures the results of which were reliable.

[11]     I acknowledge that the best method would have been the one that adhered to good accounting practices. However, in order to have applied that method, the appellant would have had to keep and provide adequate accounts supplemented by the relevant documentary evidence.

[12]     The many warnings this Court gave the appellant that it change its approach and address its real duty of discharging its burden of proof had absolutely no effect; since it obviously could not reconstruct the facts through adequate, meaningful documentary evidence, the appellant, through Charles Thiffault, chose instead to express its anger and resentment toward the respondent.

[13]     This Court is bound by the evidence adduced; in this case, that evidence was totally unsatisfactory.

[14]     On the other hand, despite the constraints and the problems reconstructing the facts, the respondent clearly showed that she acted judiciously and credibly. If this Court intervened, it would be ruling in a totally arbitrary and unjustified manner having regard to the available evidence.

[15]     For these reasons, the appeal is dismissed and the assessment is confirmed, 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 20th day of June 2003.

Sophie Debbané, Revisor