Citation: 2010 TCC 357
Date: 20100630
Docket: 2003-1048(GST)G
BETWEEN:
893134 ONTARIO INC. OPERATING AS
MEGA DISTRIBUTORS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Favreau J.
[1]
The appellant is appealing
against the reassessment made under the Excise Tax Act, Part IX,
S.C. 1990, c. 45, as amended (the “Act”), for the period from
July 1, 1998 to November 30, 2000, the notice of which bears No. 08CP117694273
and is dated December 16, 2002. By that reassessment, goods and services
tax (“GST”) in the amount of $768,118.15 was assessed against the Appellant as
a result of its failure to collect and remit the GST on its supply of
cigarettes to Zelda McNaughton/Zee’s Restaurant; penalties in the amounts of
$60,633.83 and $181,838.63 were assessed under sections 280.1 and 285 of
the Act, and interest in the amount of $55,125.33 was charged under
section 280 of the Act.
[2]
The Appellant has been
carrying on since 1997, under the name and style of Mega Distributors, the
business of wholesaling tobacco products and other grocery and confectionery items
to convenience stores, and has its principal place of business at 1285 Crawford Avenue, Windsor, Ontario.
The sole director and shareholder of the Appellant is Mr. François Francis,
who employs in the business a number of family members, including his brother
Mr. Nayef Francis and his brother‑in‑law, Mr. Tony Mansour. The
Appellant is registered for the purposes of the GST under the name of 893134
Ontario Limited, and its GST number is 142086545. The Appellant indicated 893134
Ontario Limited as its name in its corporate tax returns, GST returns and its
notice of objection, and it cashed GST refunds sent to it in that name.
[3]
The Appellant alleged that
it was approached in December 1998 by Ms. Zelda Kim McNaughton (“Zelda”),
a Mohawk status Indian of the Six Nations Reserve (the “Reserve”) in Ontario,
who was interested in purchasing large orders of cigarettes for delivery at her
business premises in Hagersville on the Reserve. Her business was operating
under the name of Zee’s Restaurant and Tobacconist Warehouse (“Zee’s”). The
Appellant agreed to sell and deliver large orders of cigarettes to Zelda, The
sales commenced on December 16, 1998 and continued until November 29,
2000, and. the amounts of the sales were as follows:
|
December 31, 1998
|
$246,777.30
|
|
March 31, 1999
|
$2,304,086.40
|
|
June 30, 1999
|
$362,950.32
|
|
September 30, 1999
|
$1,524,379.12
|
|
December 31, 1999
|
$866,632.40
|
|
March 31, 2000
|
$1,569,883.04
|
|
June 30, 2000
|
$2,918,906.48
|
|
September 30, 2000
|
$1,615,785.61
|
|
December 31, 2000
|
$670,200.91
|
|
|
$12,081,601.58
|
The Appellant reported these sales for GST purposes on
a quarterly basis until September 30, 1999. Thereafter, beginning on
October 31, 1999, the Appellant reported for GST purposes on a monthly
basis.
[4]
During the period
beginning in July 1998 and ending on December 31, 2000, the Appellant’s
total sales were approximately $25,648,000 with over $19 millions of these
being large tobacco sales, of which $12,081,600 were tobacco sales to Zee’s.
[5]
The Appellant paid GST
when it purchased the cigarettes but did not collect GST on their resale to Zelda
because they were delivered to a status Indian on the Reserve. Zelda was not
registered for GST purposes.
[6]
The Appellant
recognized that the GST payable on tobacco sales to Zee’s, if these were
taxable, would total $845,712. The Appellant was reassessed for the lower
amount of $768,188.15 on the basis of an analysis by the Canada Revenue Agency
(“CRA”) of all taxable sales made by the Appellant, including the sales to
Zee’s less all GST remittances made by the Appellant. The difference of
$77,523.85 represents an over-remittance of GST by the Appellant.
[7]
As a result of the
untaxed sales of tobacco products to a Mohawk status Indian, the Appellant
claimed a refund in its GST return in its first quarterly period of 1999 ending
March 31, 1999. The refund claimed was in the amount of $200,597.17. The
claim was reviewed by a CRA auditor, Mr. Frank D’Agnillo, of the Windsor Tax
Services Office. After a review of the documents and records of the Appellant,
including the general ledgers in support of the GST claim, the invoices of the
suppliers of the cigarettes purchased by the Appellant for resale and the sales
receipts signed or initialled by Zelda, and after verification of Zelda's Indian
status, the GST refund was approved, as claimed, and paid to the Appellant.
[8]
The margins on the
sales of tobacco products were thin, and the Appellant claimed that it suffered
losses, which it accepted in an attempt to generate sales volume. To handle the
large volume of cigarettes which had to be picked up and delivered, the
Appellant entered into a 45-month lease for a GMC Topkick on February 19,
1999. The Appellant attempted to become a direct wholesaler for Imperial
Tobacco and Rothmans, which would have allowed it to acquire cigarettes
directly from the manufacturer at significantly lower cost. The resulting savings
would have insured profitability on the low-margin sales.
[9]
The Appellant was
ultimately designated a direct wholesaler for Rothman’s but it was never able
to obtain such a designation from Imperial Tobacco.
[10]
The Appellant applied
for designation, and on August 1, 1999 was designated, as a collector of
the tax imposed by the Ontario Tobacco Tax Act, R.S.O. 1990, c. T‑10,
as amended. To be so designated, the Appellant had to provide a $1,000,000
surety in favour of Her Majesty the Queen in right of the Province of Ontario, which was obtained on July 12, 1999
and renewed the following year, at an annual cost of $15,000. The Appellant
alleged that this application was made in order to become a direct wholesaler.
[11]
The audit of the
Appellant, which began in the fall of 2000, resulted in a reassessment issued
on May 2, 2001 for the period under appeal. That reassessment principally
adding as payable the GST that it is alleged should have been collected on all
sales to Zelda. A notice of objection to this reassessment was filed on
May 28, 2001 and a notice of decision was issued on December 16, 2002
together with the new reassessment bearing the same date.
[12]
The audit of the Appellant
that began in December 2000 was conducted by two members of the Special
Investigations branch of the CRA who had served as part of a joint forces team
that had throughout the year 2000 conducted a criminal investigation of
cigarette sales in the Windsor area. The Royal Canadian Mounted Police (“RCMP”)
and the Ontario Ministry of Finance, Tobacco Tax Branch also participated in
this joint forces investigation.
[13]
The alleged scheme
investigated by the joint forces team involved cash sales of cigarettes to
Windsor convenience store owners, sales which it was alleged were reported by
the Appellant for GST purposes as having been made tax-free to a status Indian,
Zelda McNaughton. This investigation lasted from February 15, 2000 to October
31, 2000 and involved 52 days of surveillance of the Appellant’s employees
or agents (including Mohammed Nizam but not Ali Nizam, although a vehicle
registered to Ali Nizam was under surveillance during the investigation). The
Nizams were frequently observed by the joint forces investigation team picking
up at Costco Wholesale (“Costco”) cases of cigarettes ostensibly ordered by the
Appellant and delivering them to convenience stores in Windsor.
[14]
Mohammed Nizam began
working in the year 2000 on a part‑time basis for the Appellant while his
brother, Ali Nizam, owned and operated a downtown convenience store known as
Tower Variety or Tower Convenience Store.
[15]
The investigation of
the joint forces team was abandoned in November 2000 without any criminal
charges being laid against the Appellant, its employees or agents. Throughout
the investigation, the CRA processed the GST returns of the Appellant and sent
it refund cheques until the audit started. The monthly GST refunds for October
and November 2000 were frozen upon the commencement of the audit by the Special
Investigation Branch of the CRA in December 2000.
[16]
The Appellant’s records
reveal that over the two-year period 145 sales or more in respect of which the
Appellant signed invoices were delivered to Zelda. Most of the invoices are
initialled (“ZM” or “ZMcNaughton”) at the bottom while the others have the name
of Michael McNaughton, Ms. McNaughton’s son, printed on them, but none of
them makes mention of delivery of the goods to the Reserve.
[17]
In assessing the
Appellant, the Minister of National Revenue (the “Minister”) relied on, inter
alia, the following assumptions set out in paragraphs 13(i) to 13(o) of the
Further Amended Reply:
a.
The Appellant’s employment records show that the
employees who allegedly made the deliveries to the reserve were not on staff at
all the relevant times, or were not at work on the dates when sales were made.
i.
During the period under appeal, the first sale
from the Appellant to Zee’s was on December 16, 1998 and the last sale to
Zee’s was on November 29, 2000.
ii.
Mr. Francis initially claimed that Mohammed
Nizam (“Mohammed”) made all the deliveries to the reserve.
iii.
Mohammed worked for the Appellant from
January 4, 2000 to October 6, 2000.
iv.
The days worked by Mohammed, as recorded in the
Appellant’s payroll records, do not coincide with the alleged deliveries to
Zee’s.
v.
Adnan Nizam (“Adnan”) worked for the Appellant
from May 19, 1999 to October 1999.
vi.
The days worked by Adnan, as recorded in the
Appellant’s payroll records, do not coincide with the alleged deliveries to
Zee’s.
vii.
Mr. Francis stated that Indians picked up
cigarettes at the Appellant’s place of business until the time when Adnan
started.
viii.
While Mr. Francis said his brother Nayef Francis
(“Nayef”) must have made the deliveries during the period between October of
1999 and January 2000, Nayef Francis was unable to provide details of or
particulars about any deliveries he made.
b.
The vehicles allegedly used to deliver the
cigarettes to the reserve were not large enough to hold the quantities being
supplied at one time.
i.
The two employees who were alleged to have made
most of the deliveries, Mohammed and Adnan, were not licensed to drive the
Appellant’s only large truck, a leased GMC Topkick.
ii.
Both Mohammed and Adnan have indicated that they
never used the Appellant’s leased GMC Topkick to make deliveries to Zee’s.
iii.
Adnan claims to have used the Appellant’s blue
Chrysler mini van to make the deliveries to Zee’s.
iv.
Mohammed claims to have used his own Astro van
to make deliveries to Zee’s.
v.
Nayef indicated that he used mainly the
Appellant’s blue Chrysler mini van or his own Grand Caravan to make the
deliveries. He also drove the Appellant’s leased GMC Topkick a couple of times.
vi.
The carrying capacity of the vans is
approximately 30 cases or 1500 cartons of cigarettes.
vii.
Based on the sales records available from the
Appellant, of 145 orders allegedly delivered to the reserve, 121 were over
30 cases each. Some orders were as high as 174 cases and some that
were under 30 cases had additional orders for the same date, which would
put them over [the]30 case capacity of the vans.
viii.
It would be physically impossible to deliver the
volume of cigarettes shown on the Appellant’s individual sales receipts to
Zee’s in the vans with the trips said to have been made.
c.
The Appellant claimed that he insisted on being
paid in cash by Zelda McNaughton because he was concerned about counterfeit
money and NSF cheques.
d.
The Appellant’s records show that many payments
were made by “debit”, which suggest payment occurred by debit card at the
Appellant’s premises.
e.
Zelda McNaughton allegedly always paid for the
cigarettes in cash at the time of delivery.
f.
The individuals that the Appellant identified as
drivers provided a dollar range of cash payments they claim to have collected when
goods were dropped off on the reserve. The amounts are not consistent with the
quantity of goods the Appellant reports as being delivered to the reserve.
i.
When asked what was the most cash they ever had
to bring back from the reserve to the Appellant, Mohammed said $40,000, Adnan
said $40,000 to $50,000 and Nayef said about $30,000.
ii.
According to the Appellant’s records, the
majority of the sales (79% of all orders) to Zee’s were for well over $50,000.
In fact, 60% of them were over $75,000 and 37% of them were over $100,000.
g.
The said cigarettes were not delivered by the
Appellant or an agent of the Appellant to the purchaser at an address located
on an Indian Reserve.
[18]
Concerning the
assumptions made in paragraph 13(i) of the Respondent’s Further Amended
Reply, the Appellant stated in the Answer to the Notice of Reply that its
payroll records were accurate as to the total hours worked by its employees but
were not accurate as to the particular dates worked.
[19]
Adnan Nizam testified
at the hearing. He admitted having been on the payroll of the Appellant from
May 26, 1999 to October 20, 1999, and he confirmed having made
deliveries of cigarettes to the Reserve twice a week. The Appellant's payroll
records show 8 hours of work per day at $7.00 per hour paid every two
weeks. He stated that he was paid cash. The trip from Windsor
to the Reserve normally took him from three hours to three hours and
15 minutes.
[20]
In cross‑examination,
he described what happened in a typical daily operation. He would receive a
telephone call from François Francis or from his brother the day before a
delivery had to be made to the Reserve. On the day of the delivery, he took the
Appellant’s blue minivan parked at the Appellant’s place of business on Crawford Street, which was already loaded with cigarettes in sealed
cases (the maximum capacity of the van was 23 to 25 cases of cigarettes). His
destination was Zee’s where he met Zelda. The van was unloaded, Zelda signed
the receipt already made up, and she handed to him the receipt and the payment for
the cigarettes in cash. He counted the money and put it in a bag. On his way
back, he filled up the minivan with gasoline and parked the van at the
Appellant’s place of business. He went inside the Appellant’s office and handed
over the receipt from Zelda, the cash and the gasoline receipt. During his
testimony, he said that he never kept the cash, that he had no access to the
place where the cash was kept and that he himself never placed any orders for
Zelda.
[21]
He further confirmed
that: (i) there was only one receipt per load; (ii) he never made more than one
trip per day; (iii) he dealt only with Zelda; (iv) he never brought back the
cigarettes; (v) Zelda never gave him orders for cigarettes; and (vi) he
never used the minivan to make local deliveries of cigarettes. Concerning the
signature of the receipts he confirmed that he never saw Zelda actually signing
them and he could not remember if the receipts had duplicates and if some
receipts had a different signature.
[22]
Mohammed Nizam testified
at the hearing. He confirmed that he worked for the Appellant in the year 2000
(from March to October) delivering cigarettes to Zee’s on the Reserve. The
payroll record of the Appellant shows that Mohammed Nizam did not work
during the months of January and February of the year 2000. He said that he
used his own vehicle, a red GM Astro van, to make the deliveries. The maximum
capacity of his van was about 30 cases of cigarettes (50 cartons per
case). The van was loaded at the Appellant’s place of business and the receipts
to be signed were given to him. Upon delivery, the receipts were signed and
payment for the cigarettes was made in cash, usually in amounts varying from
$40,000 to $50,000. The receipts and the cash were brought back and handed over
to François Francis. When confronted with the receipts that were signed
during the period he made deliveries to the Reserve, he did not remember having
collected the amounts of money shown on the receipts, which, with the exception
of only one receipt, exceeded by far the maximum amount of money he said he had
handled. Finally, he also confirmed in a rather weak way that he had made
deliveries of cigarettes in the Windsor area.
[23]
For the period from
December 1998 to May 1, 1999 (before Adnan started working for the
Appellant), there is no evidence of deliveries of cigarettes to the Reserve. At
one point, François Francis said that Zelda was picking up the cigarettes at
the Appellant’s place of business, and, at another, he said that the deliveries
were made by his brother, Nayef.
[24]
Zelda McNaughton
testified at the hearing. She confirmed that the receipts for the deliveries of
cigarettes on the Reserve were prepared by the Appellant and given to her for
signature. She recognized her signature on approximately 70% of the receipts.
Other receipts were signed by her sisters, Kelly and Allison, and some by her eight-year-old
son, Michael. In her testimony, she said that she was buying cigarettes for the
Appellant and that the cigarettes were picked up on the Reserve. No documentary
evidence supporting this assertion was however filed in court. No invoices, no
orders and no proofs of payment were provided to the Court.
[25]
The cigarettes
delivered on the Reserve were allegedly always paid for in cash at the time of
delivery. In the following extract from the examination for discovery of
François Francis held on June 21, 2005, he claimed to have insisted on being
paid in cash by Zelda because he was concerned about counterfeit money and NSF
cheques.
|
609.
|
Q.
|
What about – What was the discussion about payment for the
cigarettes? Was it cash and carry?
|
|
|
A.
|
Well, once they delivered the product she will have cash for them.
She will pay them for it.
|
|
610.
|
Q.
|
And pay them how, with a check?
|
|
|
A.
|
No, usually cash.
|
|
611.
|
Q.
|
Usually cash or cash only?
|
|
|
A.
|
Cash only.
|
|
612.
|
Q.
|
Did you insist that it be cash only?
|
|
|
A.
|
Yes.
|
|
613.
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Q.
|
And why was that?
|
|
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A.
|
Well, it’s too many factor. You’ll be afraid from an NS (sic)
check to take check from her.
|
|
614.
|
Q.
|
You’d be afraid of an NSF—an NSF check—
|
|
|
A.
|
Yes.
|
|
615.
|
Q.
|
-- if you took a check from her. So you wanted cash from her.
|
|
|
A.
|
Yes.
|
|
616.
|
Q.
|
That was the only—And did she ask for payment terms?
|
|
|
A.
|
Yes.
|
|
617.
|
Q.
|
What payment terms did you offer her?
|
|
|
A.
|
I didn’t offer her any terms.
|
|
618.
|
Q.
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No terms.
|
|
|
A.
|
I told her I can’t afford it.
|
|
619.
|
Q.
|
Cash only.
|
|
|
A.
|
Yes.
|
[26]
Contrary to what the
Appellant claimed, a number of receipts signed by Zelda shows no payment made,
or balance payable, or amount due, which suggests that the payment occurred by
credit card at the Appellant’s premises. The evidence clearly establishes that
the receipts were prepared in advance by the Appellant and that the payments
for the cigarettes delivered on the Reserve were not all made in cash.
[27]
François Francis
testified at the hearing. He stated that the cash brought back by the drivers
was kept in a locked filing cabinet and that the drivers had access to the keys
to the cabinet. This was contradicted by Adnan Nizam in his testimony. There is
also no evidence that the cash was deposited in a bank account.
[28]
When questioned
concerning the person or persons who filled the orders from Zelda, he said that
everyone could fill the orders, including the drivers. No evidence of orders
from Zelda was produced in court and no information was provided on how the
orders from Zelda were received (by fax, by telephone or by e-mail), by whom
the orders were filled or by whom the receipts were prepared. Zelda required
custom-packed cigarettes and the drivers denied having prepared such orders for
Zelda.
[29]
In the continuation of his
examination for discovery on June 22, 2005, François Francis stated that
the Appellant made no deliveries of cigarettes to clients other than Zelda in
1999 and 2000. From the Appellant’s client list, it is clear that the Appellant
did make deliveries of cigarettes to other clients (see paragraphs 37 and
38 below).
[30]
In March 2000, an
agreement between the Ontario Ministry of Finance –Special Investigations
Branch, the RCMP and the CRA was entered into to facilitate the
cooperation of those three agencies in a specific joint forces operation
(“JFO”). The objective of this JFO was to gather evidence against persons and
corporations who had allegedly illegally evaded payment of the provincial retail
sales tax and the federal goods and services tax, thereby allegedly committing
offences contrary to the Tobacco Tax Act, the Excise Tax Act and
the Criminal Code of Canada.
[31]
Mr. Ian McGuffin, the
project supervisor for the CRA on the JFO, testified at the hearing. He stated
that the JFO was set up because the Ministry of Finance of Ontario had received information that cigarettes were being distributed
at discounted prices to local retailers in the Essex County area without the GST being collected. At one of the first JFO
meetings, it was agreed that evidence to prove that the cigarettes were
delivered to local retailers was necessary in order to lay criminal charges
(reference note of the JFO meeting dated February 24, 2000). According to
him, the principal target was one of the Nizam brothers, but for the CRA, the
principal target was the Appellant.
[32]
The witness explained
that a comprehensive audit of the Appellant started in the month of December
2000 and that at that time the criminal investigation was dropped. In the
course of the audit, Costco agreed to provide all information concerning the
purchases of cigarettes made by the Appellant. He also explained that various
meetings were held with the Appellant, for example on February 21, 2001,
March 31, 2001 and April 4, 2001. The reassessment was made on
May 2, 2001 on the basis of the lack of records that were adequate to
prove deliveries of cigarettes on the Reserve, and the collection procedure
started on May 14, 2001. Penalties were assessed under sections 280.1 and 285
of the Act, and interest was charged pursuant to subsection 280(1) of
the Act. The Court notes that access to the completed audit file was
denied to the Appellant until the reassessment had been issued.
[33]
Mr. Bernie Campbell,
the project officer for the RCMP on the JFO, testified at the hearing. He
confirmed that he participated in the joint forces operation's surveillance of
the pickup and delivery of cigarettes by the Appellant, which was carried out
over a fifty‑two day period between February 15, 2000 and October 31,
2000. He acknowledged that he was the author of an undated report which was an
update of the investigation conducted with regard to François Francis and the
Appellant (Exhibit A‑1, Inv. 010, 011, 012 and 013). The report
was obviously prepared as part of the preliminary investigation during which
Mr. Michael Courtney of Courtney Wholesale and Confectionary was interviewed
regarding his involvement with the Appellant. Mr. Courtney explained that he
was a supplier of cigarettes to the Appellant before the Appellant started to
buy them from Costco. Mr. Courtney was apparently reluctant to prepare the
orders from the Appellant “custom packed” (that is, with a variety of brands in
each case). The report states that two Costco employees were interviewed and that
they referred to the Nizam brothers as the “Mega men”. The following extracts from
the report are particularly interesting:
With respect to the Nazim [sic] brothers the emphasis of the
investigation was shifted to Tower Variety and surveillances were carried out
through April and May on the Nazims (sic). Their activities as a result
of these surveillance [sic] have confirmed that they are the moving
force behind this crime. They appear at Costco six days per week and pick up
large volumes of yellow banded cigarettes which are delivered to local
retailers. Typically the local retailers have been determined to not be of the
large chain variety but rather unfranchised corner stores. It has also been
noted that these stores advertise cigarettes at what amounts to discounted
prices.
(Exhibit A‑1, Inv. 012, Lines 1 to 10).
. . . Costco sales will and have been approximately
250,000 per week since Mega began doing business with them. The same two people
pick up tobacco on a daily basis and they always arrive about the noon hour.
The orders are prepared on a daily basis and are based of [sic] faxes
which are sent to Costco. These faxes are numbered by Mega and Costco custom
packs them. These men (Nazim (sic) brothers) have advised Costco
employees that their Tuesday pickup is the only one that is delivered to Mega.
(Exhibit A‑1, Inv. 012, Lines 15 to 22)
This investigation has progressed in a satisfactory manner. The
informant information has been varified [sic] through surveillance and
investigation. There is little doubt at this point that Mega distributing,
François Frances (sic), Mohamad
Nazim (sic), Ali Nazim (sic) and others are committing the
offence of fraud by seeking and obtaining a G.S.T. rebate on what amounts to false
information.
(Exhibit A‑1,
Inv. 013, Lines 1 to 6)
[34]
It has been established
that the surveillance was conducted by Bernie Campbell*, Rich Cowell*,
Mark Gillian, Steve Rose*, Michael Kanras*, Lenny Washburn, Paul Desjarlais,
Cheryl Hayden, Arnie Levy, Thomas Archibald* and Lorna Kennedy, all of
whom were employed with the RCMP, by John Uprichard, Jennifer Wong, Steve
Irons* and Mike Martin, all of whom were employed with the Ontario Ministry of
Finance, and by Gerald Hooft* and Pamela Howick* of the CRA (* testified
at the hearing). On a given day of surveillance, there were normally two teams
in place. Each member of the surveillance team had a number and the numbers of
the members who were present on a surveillance day had to be mentioned on the surveillance
report of that day.
[35]
Out of the 52 days
of surveillance, there were at least 20 days on which an employee of the
Appellant was observed picking up cases of cigarettes at the Costco located at 4411 Walker Road, Windsor, Ontario, and
delivering them to local convenience stores. On many occasions, the number of
cases of cigarettes picked up at Costco was identified and the number of cases
of cigarettes delivered at each store was also observed. The time at which the
deliveries took place at the stores was also noted on the daily report prepared
by a member of the surveillance team.
[36]
For every day of
surveillance, a report had to be prepared. The report normally contained:
(1) the code numbers of the individuals making up the two-person teams conducting
the surveillance; (2) the place and time at which the surveillance
commenced; (3) the plate number of the vehicles followed and the names of
the drivers; (4) the number of cases of cigarettes loaded into the
followed vehicles; (5) the places and time of the deliveries and the
number of cases of cigarettes delivered at each store; and (6) the time at
which the surveillance ended. The code number of the member of the surveillance
team appeared beside each observation. All surveillance reports were filed in court
as Exhibit A‑1, Inv. 068 to Inv. 252.
[37]
According to the
surveillance reports, deliveries of cases of cigarettes were observed at the
following stores, all located in the Windsor area:
|
A garage (962 Lake Trail Drive)
Ace Convenience Store (corner of Moy and
Wyandotte Streets)
Ace Variety
Benson’s Corner (corner of Wyandotte and Cursy Streets)
Big Bear Food Mart and Convenience
(Ambassador Mall, 1660 Huron
Church Road)
CK Convenience Store (Lambton Plaza on Huron Church Road)
Corner Store (3244 Walker Road)
Corner Store (3250 Walker Road)
Corner Store (6915 Wyandotte)
Corner Store (corner of Erie and Victoria Streets)
Corner Store (corner of Wyandotte and Rose Streets)
Corner Store (Sandwish Street)
Corner Store and Variety (238 Erie Street)
David’s Variety (Peter Street)
David’s Variety Store
Downtown Lottery and Cigar Shop Store (159 Erie Street)
Fred’s Variety Spot
Fred’s Variety Spot (1605 Westminster)
Glengarry Confectionary
H & V Variety (Peter Street)
Half Price Variety (1705 Malloy)
Herfy’s Variety (857 University Avenue)
Herfy’s Variety Store (851 University Avenue)
LaSalle Petroleum & Variety (611 Front Road)
Maple Leaf Gas Bar and Variety (3511 Wyandotte)
Midway Convenience
Mina’s Variety (2919 Tecumseh Road)
Park Market Square (corner of Ottawa and Walker Streets)
Park Midway Convenience Store (corner of Wyandotte and Sawson Streets)
Royal Variety (corner of Tecumseh and
Church Streets)
S & A Convenience (3750 Walker Road)
Sandwich Smoke Shop
Suny’s Gas and Variety (corner of
McDougall and Howard Streets)
Suny’s Gas Bar (University Mall)
Sunrise Variety (corner of Wyandotte and Elm Streets)
Sunshine Variety (1098 Wyandotte)
Sunshine Variety and Convenience Store
(corner of Pine and Ouellette Streets)
Sunshine Variety Store
Tower Convenience Store
Zom Laundry and
Variety (1705 College Street)
|
[38]
Of the above, only the
following were not on the Appellant's customer list for the period from 1997‑01‑22
to 2001‑01‑22 that was prepared in the course of the audit and
filed as Exhibit R‑3(2), Tab 46:
|
Park Market Square
the garage
Maple Leaf Gas Bar
|
At the hearing, it was stated that the Corner Store
and Variety on Erie Street was not a regular customer of the
Appellant.
Costco orders
[39]
Three employees of the
Windsor Costco testified at the hearing: Mr. Ronald Wayne Rewakoski,
warehouse manager, Mr. Dany Daguerre, cashier, and Mr. Vino Perrera,
assistant warehouse manager. They explained how orders for cigarettes were
received from the Appellant, how orders were filled, paid for and delivered.
Mr. Rewakoski explained that his first contact with the Appellant was in
response to a call from François Francis. The meeting took place at the
Appellant’s warehouse. On that occasion, a membership card was signed and the
parties agreed on how orders of tobacco would be placed and how they would be
filled and paid for. The orders had to be placed by fax the day before the
delivery date, and each fax bore a number assigned in sequence according to the
number of orders received during the day. The Appellant required that each
order be custom-packed for its customers. Each fax was registered as a separate
order with its own total. In many cases, the fax number was also written on the
register receipt and on the boxes for each order so as to facilitate delivery. Payment
for the tobacco purchases was made in cash, by cheque or by credit card
(American Express) upon delivery. Payments in excess of $10,000 had to be made in
cash or by certified cheque.
[40]
Mr. Daguerre confirmed
the procedure followed: the orders were received by fax the day before
delivery; the orders were numbered in sequence; the cigarettes ordered were put
in cases and each case was identified by a number. Once the packing was
finished, he would register the sale, prepare the invoice and call François Francis
or his brother Nayef to confirm the total amount of the invoice. Deliveries of
tobacco products to the Appellant were made once a day four times a week upon
payment of the invoices. The orders of tobacco products were normally picked up
by Mohammed Nizam until the time he tried to pay with counterfeit money.
Thereafter, François Francis or his brother Nayef took the deliveries from
Costco. The witness also explained that the Mohammed Nizam's minivan could
hold a maximum of 30 cases and that, upon delivery, Mohammed Nizam would
give instructions as to how the cases were to be loaded into the minivan. When payment
by certified cheque was required, Mohammed Nizam had to pick up the cheque
at the Appellant’s place of business and have it certified at the National Bank
of Canada. Once the cheque was certified, delivery
could take place upon handing over that certified cheque.
[41]
Mr. Perrera confirmed
that he called the police after he realized that Mohammed Nizam had made a $20,000
cash payment in counterfeit money, all the bills had the same serial number.
[42]
Some tobacco orders were
faxed from Tower Variety, the store owned and operated by Ali Nizam. With only
a few exceptions, the orders were recorded in the Appellant’s books and the
Appellant paid for all of them no matter where the orders had come from, and it
claimed GST refunds in respect of all of them. Furthermore, the Tower Variety
fax orders matched with the appellant’s purchase records, as shown in Exhibit R‑3(7)
Tab 100.
[43]
The cheques made to the
order of Costco in payment of tobacco orders bear only one signature and François
Francis recognized at the hearing that a majority of them were signed by him.
The Appellant’s cheques to Costco issued during the period beginning on
December 31, 1999 and ending on December 18, 2000 were filed in court
as Exhibit R‑9. Statements of account from the National Bank of
Canada showing the activity in the Appellant's bank account during the period
from December 1, 1998 to December 31, 2000 were filed as
Exhibit R‑3(8), Tab 107.
[44]
The following Costco
documents were also filed in court, as Exhibits R‑8(1) to R‑8(16):
the fax orders from the Appellant for the
calendar year 2000;
the sales records for the calendar year
2000, which identified the number of items sold, the price for each item, the
total price of the order and the mode of payment; and
monthly statements showing the
daily orders.
The American Express credit card payments
[45]
In addition to the
documents referred to in paragraphs 43 and 44 above, Amex Bank of Canada statements
for the credit cards held by the Appellant’s owner, François Francis, and by
the employees of the Appellant that had been used to pay for purchases from
Costco made during the period from January 1, 2000 to January 31,
2001 were also filed in court, as Exhibit R‑3(9) Tab 108. These
statements were obtained following an application by the CRA pursuant to
subsection 289.1(1) of the Act for an order requiring the Amex Bank
of Canada to provide it with the information and documents set out in the requirement
issued to the bank. The application has been granted by Frenette D.J. (see Minister
of National Revenue v. Amex Bank of Canada, [2008] G.S.T.C. 169 (FC)).
The Audit
[46]
The GST audit started
on December 1, 2000 with the initial interview of François Francis
conducted by Ms. Pamela Howick and Mr. Gerald Hooft. Other interviews
were held with Mr. Francis on January 21 and 23 and on
February 14 and 21, 2001. Mr. Francis was cooperative in providing
the information requested. The most difficult part of the audit of the
Appellant was the computation of the GST collected by the Appellant on its
sales and the identification of the GST component of the purchases from Costco,
which were recorded on thousands of tapes. The GST computations are not contested
by the Appellant.
[47]
While the audit was
being conducted, the CRA continued to issue the GST refunds claimed by the
Appellant during the year 2000. The last claim approved was for the month of
November of that year. The GST refunds for the months of October and November
2000 were frozen upon the commencement of the audit by the CRA in December
2000.
[48]
The assessment issued
as a result of the audit was dated May 2, 2001 and the CRA initiated the
collection procedure on May 14, 2001.
Admitted facts
[49]
A Summary of Requests
to Admit Facts and Documents was filed in court as Exhibit R‑7 (the
“Summary”). Having failed to respond within the prescribed time to the various requests
made pursuant to section 130 of the Tax Court of Canada Rules (General
Procedure) (the “Rules”), the Appellant is deemed, pursuant to
paragraph 131(2) of the Rules, to admit the truth of the facts and the
authenticity of the documents listed in the Summary.
[50]
The truth and
authenticity of the following facts and documents, among others, were admitted:
1. On the dates shown
in paragraph 2 of the Summary, no tobacco sales were made to the company
or the persons shown in paragraph 1 of the Summary, namely:
a)
1256470 Ontario Ltd. O/A
Windsor Tower Variety;
b)
Ali Nizam;
c)
Mohammed Nizam;
d)
Fadi Nizam;
e)
Nazim Nizam.
2. Documents in the
Respondent’s document production in Costco Documents Volumes 1 to 16,
numbered COSTCO 0001‑4277, were sent from Mega Distributors if the
fax transmission line indicates the sender was Mega Distributors or Mega Food
Distributors.
3. Documents in the
Respondent’s document production in Costco Documents Volumes 1 to 16, numbered
COSTCO 0001-4277, were sent from Windsor Tower Convenience Store or
Windsor Tower Variety if the fax transmission line indicates the sender was “Panasonic
Fax System 4830053”.
[51]
The "fax lines
from Costco forms faxed by Tower Convenience" were filed as Exhibit R‑10.
The Appellant’s position
[52]
In paragraphs 13
to 18 of the amended Notice of Appeal, the Appellant states that the joint
forces investigation team was unsuccessful in connecting the Appellant with the
activities of the Nizam brothers and that the investigation was abandoned in
November 2000 without any criminal charges being laid. The main targets were
the Nizam brothers, who were frequently observed by the investigation team
picking up at Costco cases of cigarettes, ostensibly ordered by the Appellant,
and delivering them to convenience stores in Windsor.
[53]
The Appellant claims
that it was victimized by the Nizams and that Mohammed Nizam’s activities in
placing cigarette orders through the Appellant on the basis that they were for Zelda
and then delivering those cigarettes to local convenience stores were not known
to the Appellant and were not authorized by it.
[54]
Save for the
unauthorized activities of Mohammed Nizam, the Appellant delivered all
cigarettes purchased by Zelda to her place of business on the Reserve. Over the
two-year period from December 16, 1998 to November 29, 2000, the
Appellant’s records reveal 145 sales to Zelda in respect of all of which
the Appellant obtained signed invoices acknowledging receipt.
[55]
The Appellant pointed
out inconsistencies in the observations made by the joint forces investigation
team. For example, some deliveries were not made to clients of the Appellant.
This is the case with deliveries seen made to Downtown Lottery and Variety on
March 28 and April 27, 2000; the owner of that store,
Mr. Charlie Sleiman, testified at the hearing and confirmed that he never
purchased cigarettes from the Appellant. On some days, the surveillance team
reported no activity when in fact purchases were made by the Appellant; on
other days, the number of cases purchased by the appellant was smaller than the
number of cases picked up, or there were returns to Costco that were not accounted
for. For example, for May 1, 2000 there was an observation that one case
of cigarettes was delivered at Suny’s Gas Bar at University Mall while no sale was
recorded in the Appellant’s books.
Analysis
[56]
The issues are as
follows:
a)
Did the Appellant or
its agents deliver the tobacco products at issue to Zelda/Zee’s at an address
located on a reserve?
b)
If the tobacco products
were not delivered on a reserve, should the Appellant be responsible for acts
of its employees?
c)
Was the Appellant
grossly negligent in failing to collect and remit GST of $768,188.15 and is it
therefore liable for a penalty of $192,047.03 pursuant to section 285 of
the Act?
[57]
Section 87 of the Indian
Act, R.S.C. 1985, c. I-5, exempts from taxation any Indian's personal
property that is situated on a reserve. Subsections 87(1) and (2) read as
follows:
87. (1) Notwithstanding any other Act of Parliament or any Act of
the legislature of a province, but subject to section 83, the following
property is exempt from taxation, namely,
(a) the interest of an Indian or a band in
reserve lands or surrendered lands; and
(b) the personal property of an Indian or
a band situated on a reserve.
(2) No Indian or band
is subject to taxation in respect of the ownership, occupation, possession or
use of any property mentioned in paragraph (1)(a) or (b) or is
otherwise subject to taxation in respect of any such property.
[58]
As the Act does
not deal specifically with Indians, the CRA published on November 25, 1993,
Technical Information Bulletin B-039R entitled "GST Administrative Policy
– Application of the GST to Indians", amended by Notice of Change in July
1996. This version of the Bulletin replaced the earlier version dated January
4, 1991.
[59]
Under the administrative
policy set out therein, Indians may acquire property off reserve without paying
the GST, provided :
1.
they have the appropriate
documentation to show the vendor; and
2.
the property is
delivered to a reserve by the vendor or the vendor's agent.
[60]
For off-reserve
purchases of property delivered to a reserve, the vendor is required to
maintain adequate evidence that the sale was made to an Indian registered under
the Indian Act and proof of delivery indicating a reserve as the
destination of the property.
[61]
Where merchandise is
delivered to a reserve in the vendor's own vehicle, the Bulletin specifies that
the vendor must maintain proof that delivery was made to a reserve. This will
be indicated on the invoice of the vendor and on the vendor's internal records
(e.g., mileage logs, dispatch records).
[62]
The reassessment was
made on the basis that there were no deliveries of tobacco products on an
Indian reserve and that section 87 of the Indian Act did not relieve the
Appellant of the obligation of collecting and remitting GST on the supply of the
said tobacco products.
[63]
In view of the evidence
submitted by the parties, I am of the opinion that it has not been proven on a
balance of probabilities that delivery of the tobacco products took place on the
Reserve. In arriving at that conclusion, I considered the observations
summarized by counsel for the Respondent, who divided the period covered by the
reassessment into four periods, as follows:
(a)
From December 1998 to
May 1999, that is, prior to the hiring of Adnan Nizam
- As admitted by François
Francis, there was no evidence of the delivery of tobacco products to an Indian
Reserve. Zelda was picking up the cigarettes at the Appellant's warehouse.
(b)
From May 1999 to
October 1999
- Following a call from François
Francis, Adnan Nizam was asked to make deliveries of cigarettes to Zelda.
- François Francis told
him how to get to the Reserve and how to handle the cash received after the
signature of the receipts.
- The receipts were
unreliable because the van used to make the deliveries had a maximum capacity
of only 23 to 25 cases of cigarettes and because Adnan never handled cash amounts
as significant as the amounts shown on the receipts.
(c)
From October 1999 to January
2000
-
There was no evidence
of any delivery of tobacco to the Reserve during that period.
(d) From January 2000 to
November 2000, that is, the time during which the deliveries were made by Mohammed
Nizam).
-
For the months of
January and February, Mohammed Nizam was not on the payroll of the Appellant,
and no evidence was submitted as to who made the deliveries to the Reserve
during those two months.
-
The red Astro van
allegedly used by Mohammed Nizam to make the deliveries of the tobacco products
to the Reserve had a maximum capacity of 30 cases of cigarettes, and only one
receipt came close to the kind of money that he testified he had handled.
-
The receipts submitted
were also not reliable because a considerable number of them were not signed by
Zelda.
[64]
The following
inconsistencies were also taken into consideration by the Court:
(a) Contrary to the
Appellant's assertion, it has been clearly demonstrated through the
surveillance that the Appellant’s tobacco products were delivered to local
stores by the Appellant, or its agents, or its employees.
(b) The reference to the
fact that Zee's was a customer that had to pay cash for all its purchases of
tobacco products from the Appellant was also incorrect considering the entries
made on the receipts.
(c) The assertion that
Mohammed Nizam acted without having been authorized to do so by the Appellant
was also contradicted by what Mohammed Nizam stated in his examination for
discovery, namely that he had authority to do everything, to take and prepare
orders, and to handle the cash received.
(d) Contrary to the
claim made by François Francis that he had no knowledge of the preparation of
the receipts for the sale of tobacco products to Zee's, the evidence reveals
that he is a well-informed business person who is very knowledgeable concerning
the Appellant's operations and grocery distribution in general. He arranged the
purchases of custom-packed cigarettes with the Costco manager. He was the
person who was called by the Costco cashier to confirm the amounts of the invoices.
He alone signed most of the cheques issued in payment of the orders from Costco
and he was the person to whom Costco's monthly report showing the Appellant's daily
orders during the month was sent.
[65]
Having determined that
the tobacco products were not delivered on the Reserve, the Court must now
consider whether or not the Appellant should be responsible for the acts of the
Nizam brothers and, in particular, for the acts of Mohammed Nizam, while they
were employed by the Appellant.
[66]
Considering the facts,
I am of the opinion that the Appellant did not adduce sufficient evidence to
enable me to conclude that Mohammed Nizam was placing cigarette orders through
the Appellant on the basis that they were for Zelda but delivering them to
local convenience stores without the knowledge and authorization of the
Appellant. I cannot believe that this could have been done in the small Windsor market, particularly when almost all the deliveries
were made to the Appellant's customers. In any event, the Appellant, as the employer
of Adnan and Mohammed Nizam, is vicariously liable for those employees'
authorized acts and for their unauthorized acts having a connection with the
authorized acts. The vicarious liability principle was considered by the
Supreme Court of Canada in 671122 Ontario Ltd. v. Sagaz Industries Canada
Inc., [2001] 2 S.C.R. 983, 2001 SCC 59, and in Bazley v. Curry, [1999]
2 S.C.R. 534.
[67]
The penalty provided
for in section 285 of the Act has been assessed against the Appellant.
The section 285 penalty corresponds to that in subsection 163(2) of the Income
Tax Act. Generally speaking, section 285 of the Act imposes a
penalty on a person for knowingly, or under circumstances amounting to gross
negligence, making or being a party to the making of a false statement or an omission
in a return or other document relating to a reporting period or transaction of
the person. The penalty is equal to the greater of $250 and 25% of the total of
any reductions in tax owing and any increases in refunds or rebates as a result
of the false statement or omission.
[68]
The notion of
"gross negligence" for the purpose of applying a penalty under the Act
or the Income Tax Act is defined in the following terms by Justice
Strayer in Venne v. The Queen, 1984 DTC 6247, at page 6256:
"Gross negligence" must be taken to involve greater
neglect than simply a failure to use reasonable care. It must involve a high
degree of negligence tantamount to intentional acting, an indifference as to
whether the law is complied with or not.
[69]
The burden of
demonstrating that the Appellant has been grossly negligent is on the Minister
of National Revenue, and the question of whether a finding that the Appellant
acted knowingly or with gross negligence requires further scrutiny of the
evidence.
[70]
In this instance, I am
of the opinion that the Respondent has met the burden of establishing by direct
evidence that the Appellant was grossly negligent in failing to collect and
remit GST and that it made, participated in, assented to or acquiesced in the
making of a false statement in a return in respect of the supply of tobacco
products to Zee's.
[71]
The Appellant is a
corporation carrying on a business that is owned by François Francis, who
participated fully in the daily operations of the business. François Francis
knew, or ought to have known, that for a sale to a status Indian to be exempt
from GST he was required to deliver the goods to an Indian Reserve and to
maintain proof of delivery. In paragraph 10 of the Answer filed by the
Appellant's counsel on June 16, 2003, the Appellant admitted having
received from its accountant on May 10, 1999 a copy of the spring 1999 edition
of the GST News dealing with sales to Indians.
[72]
On the facts, I find that
the Appellant knowingly made false statements in its GST returns and made
misrepresentations in order to make it appear that tobacco was being delivered
to the Reserve when in fact it was not.
[73]
The Court also holds that
the Appellant is estopped by its own representations from relying on an error
in the name under which it has been reassessed. The reassessment remains valid
and binding despite the irregularity consisting in the misnomer with regard to the
Appellant.
[74]
The appeal is dismissed
with costs.
Signed at Ottawa, Canada, this 30th day of June 2010.
"Réal Favreau"
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