NAME: 9110-1568 Québec Inc. "La Sila"
GST: 144242377 RT 0001
QST: 1090011061 TQ0001
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ANALYSIS OF TOTAL PERCENTAGE GRANTED ANNUALLY
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|
These figures are in working papers tabs 200x and
200x
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|
|
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Years
|
|
Litres purchased
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Kitchen allowance
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Manager employees promo party consumption
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Allowance for increase
final inventory
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Various allowances
theft, breakage
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Litres for resale
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Allowance in percentage without kitchen
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Allocation in percentage
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|
|
|
|
|
|
|
|
|
|
|
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2001-12-01 to
2002-11-30
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5,564.77
|
664.00
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433.46
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|
67.87
|
4,399.45
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9%
|
21%
|
|
|
|
|
|
|
|
|
|
|
|
|
2002-12-01 to
2003-12-31
[sic]
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5,351.71
|
736.00
|
422.60
|
|
65.02
|
4,128.08
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9%
|
23%
|
|
|
|
|
|
|
|
|
|
|
|
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2003-12-01 to
2004-11-30
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6,233.33
|
821.00
|
431.00
|
160.00
|
75.03
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4,746.30
|
8%
|
24%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,149.81
|
2,221.00
|
1,287.06
|
160.00
|
207.92
|
13,273.83
|
9%
|
23%
|
Nota: No physical inventory record was submitted with
the financial records, in support of the items in stock.
This resulted in:
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|
Litres of alcohol purchased
|
Allowance granted by the Minister
|
Litres of alcohol considered sold
|
|
Year 1
|
5,564.522
|
1,165.33
|
4,399.45
|
|
Year 2
|
5,371.712
|
1,223.62
|
4,128.08
|
|
Year 3
|
6,233.33
|
1,487.03
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4,746.30
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Generally, the Minister presumed that all
the litres of alcohol purchased (minus the allowances granted) had been sold,
given that the ITC were claimed for all the purchases and there was no alcohol
inventory at the beginning of each of the years in question.
(ii)
Then, the Minister
reviewed the sales receipts. To estimate the actual sales, and compare them to
the reported sales, the Minister carried out a sampling. It was a statistical
sampling of the food bills. The Minister calculated the appellant's sales (from
which he deducted the rebates and the GST and QST billed to the clients) and
the litres of alcohol sold during 55 days (selected at random by a computer
program) from year 1, 47 days (selected at random by a computer program) from
year 2, and 43 days (selected at random by a computer program) from year 3.
Then, the Minister established a sales ratio for the sample periods, dividing
the total sales by the total number of litres of alcohol sold. This resulted
in:
|
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Net sales
|
Litres of alcohol sold
|
Ratio
|
|
Year 1 (55
days)
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80,471.65
|
559.048
|
$143.9440
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|
Year 2 (47
days)
|
70,868.52
|
458.493
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$154.5682
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Year 3 (43
days)
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71,316.91
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451.524
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$157.9470
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In other words, according to this method,
each litre of alcohol sold would have generated net sales of
$143.9440, $154.5682 and $157.9470 in year 1, year 2 and year 3,
respectively. Ms. Dagenais explained that the ratios in question represent
values used to estimate the total sales for the relevant years. Since the
purchase invoices indicated that 4,399.45 litres of alcohol had been purchased
in year 1 (after deducting the allowance), the Minister multiplied the number
of litres purchased by $143.9440 (year 1 ratio) and calculated that the
appellant had made taxable supplies of $633,237.82 that year. I note that the
appellant had reported making $542,588.00 in taxable supplies in year 1.
According to the Minister, the appellant allegedly made unreported taxable
supplies of $90,649.82 (representing a difference of 16.71%). Since the
purchase invoices showed that 4,128.086 litres of alcohol had been purchased
in year 2 (after deducting the allowance), the Minister multiplied the number
of litres purchased by $154.5682 (year 2 ratio) and calculated that the
appellant had made taxable supplies of $638,070.92 that year. I note that the
appellant had reported making $506,335.00 in taxable supplies in year 2.
According to the Minister, the appellant allegedly made unreported taxable
supplies of $131,735.92 in year 2 (representing a difference of 26.02%). Since
the purchase invoices indicated that 4,746.30 litres of alcohol had been
purchased in year 3 (after deducting the allowance), the Minister multiplied
the number of litres purchased by $157,9470 (year 3 ratio), and calculated
that the appellant had made taxable supplies of $749,634.41 that year. I note
that the appellant had reported making $610,881 in taxable supplies in year 3.
According to the Minister, the appellant allegedly made unreported taxable
supplies of $138,753.41 in year 3 (representing a difference of 22.71%).
[11]
During the October 2007
hearing, the appellant showed some of the Minister's errors regarding the
litres of alcohol sold during the sample days. The hearing was adjourned to
allow the parties to discuss all the errors the Minister might have made in
this regard. At the return of the hearing in May 2009, the Minister admitted he
made certain errors during the initial audit. After a second audit, the
Minister established that during the sample period of year 1 (55 days), the
appellant made net sales of $80,277.39 (after deducting the rebates and GST and
QST billed to clients) and had sold 571.90 litres of alcohol during that
period. The Minister established the new sales ratio during this sample period
at $140.3695 (a difference of 3.75% compared to the sales ratio initially
established by the Minister) and therefore, the appellant made taxable supplies
of $617,486.19 during year 1. After this second audit, the Minister
established that during the sample period of year 2 (47 days) the appellant
made net sales of $69,702.00 and had sold 475,265 litres of alcohol
during that period. The Minister established the new sales ratio for this
period at $146.659 (a difference of 7.91% compared to the sales ratio
initially established by the Minister) and therefore, the appellant made
taxable supplies of $605,409.05 during year 2. As for year 3, the Minister did
not conduct a new audit of the appellant's net sales and litres of alcohol sold
during the sample period (45 days) for that year. Moreover, he determined the
new sales ratio for year 3 was $152.04. The Minister determined this ratio
using the following calculation:
(Z) – ( (X + Y) ) x (Z) ) = $152.04
2
Z being the initially
established sales ratio for year 3, in this case $157.95;
X being the difference in
percentage between the sales ratio initially established by the Minister
($143.94) and the sales ratio subsequently established by the Minister
($140.37) for year 1, in this case, a difference of 2.48%;
Y being the difference in
percentage between the sales ratio initially established by the Minister
($154.57) and the sales ratio subsequently established by the Minister
($146.66) for year 2, in this case, a difference of 5%.
The Minister used this new sales ratio to determine
that the appellant had made unreported taxable supplies in the amount of
$110,957 in year 3.
[12]
To summarize, after the
second audit, the Minister established the sales ratios at
$140.3697, $146.6592 and $152.04 for year 1, year 2 and year 3
respectively. I will restate that after the first audit, the Minister had
established the sales ratios at $143.9440, $154.5682 and $157.9470 for year 1,
year 2 and year 3 respectively. As a result, after the second audit, the
Minister established that the appellant had made unreported sales of
$74,898.19, $99,074.059 and $110,957 in year 1, year 2 and year 3
respectively. After the first audit, the Minister had established that the
appellant had made unreported sales of $90,649.82, $131,735.92 and
$138,753.41 in year 1, year 2 and year 3 respectively. As a result, after
the second audit, the appellant's alleged unreported sales dropped by
$76,209.28, which explains that at the return of the hearing in May 2009, the
Minister agreed to reduce the amount of the GST initially assessed by
$5,340.94.
Appellant's position
[13]
The appellant claims
that:
(i)
the Minister was not
justified in using an indirect method of auditing its business;
(ii)
the indirect method
used by the Minister is purely arbitrary, an estimation that does not have the
required level of reliability, in particular:
(a)
the Minister's errors
regarding the number of litres of alcohol sold during the sample days were
substantial;
(b)
the number of litres of
alcohol purchased or sold by the appellant simply has no direct link to the
number of meals sold or the value of those meals;
(c)
the Minister's sample
is simply not representative of its commercial reality;
(iii)
the allowance for
losses, breakage, bonuses, promotion and kitchen use granted by the Minister
does not reflect reality;
(iv)
the Minister is not
within his right to reduce the ITC by $4,096.08.
Analysis and conclusion
Indirect audit method
[14]
In regard to the
appellant's position that the Minister was not justified in using the indirect
audit method, my comments will be very brief. When financial records are not
reliable and when books and registers are inadequate or even nonexistent, the
taxpayer is at risk for an audit that might lead the Minister to use less
precise methods to establish the amount of under-estimated taxable supplies.
Considering the evidence before me, the Minister was justified in using the
indirect method in this case.
Errors by the Minister regarding number of litres of
alcohol sold during the sample days
[15]
Counsel for the
appellant admits that his client had the burden of proving that the estimation
method the Minister used to establish the appellant's sales was unreliable.
However, he claims that by showing that the Minister committed significant
errors regarding the litres of alcohol sold during the sample days, his client
had, in a way, shown prima facie evidence that the method was
unreliable. He added that from the time this prima facie evidence was
made by his client, it was the Minister's responsibility to show that his
estimation method was reliable. The truth is, during the hearing in October
2007, the appellant claimed that after having raised certain errors the
Minister had made in that regard, the estimation method he used was unreliable
and, to a certain extent, the burden of proof was reversed. I then asked
counsel for the appellant if the appellant was able to show that the errors
were significant. Clearly, the appellant was not able to do so. In a purely
generous gesture, I adjourned the hearing, in particular to allow the appellant
to better prepare itself, make note of the errors the Minister might have made
and, lastly, to inform the Minister of them, when relevant, before the return
of the hearing. The appellant finally did the work that, in my opinion, should
have been done at the objection stage. Once the Minister was informed of his
errors, he admitted them, except for a minor error regarding the consumption of
20 glasses of kir that had allegedly been sold in 2004 and represented an error
of 1.7 litres of alcohol. I note that the Minister did not want to correct this
error on the ground that he had been sufficiently generous by acknowledging the
errors he had been informed of (after the adjournment in October 2007), and
because after obtaining the invoices of the appellant's alcohol purchases from
the SAAQ [sic] for the period in question (after the adjournment), he
realized that substantial quantities of alcohol the appellant had purchased
during that period were not included in the calculations when the assessment
was made since the appellant had not given the Minister all the alcohol
purchase invoices at the audit stage. In my opinion, the appellant is trying to
defend the indefensible. It is using unjustified procedural tactics to attack
an assessment by arguing an alleged reversed onus. In my opinion, this argument
must be dismissed.
Non-representative sample of the
appellant's commercial reality
[16]
Counsel for the
appellant claims that his client made a prima facie case that the method
used by the Minister was not reliable and that his sample was not
representative of the commercial reality and that the burden of proof was
therefore reversed. Since counsel for the appellant basically read from his
litigation plan during his arguments, I will reproduce the relevant part below,
so as not to distort his reasoning:
[translation]
B- Non-representative sample
(i)
2001-2002 period
29. The appellant respectfully
submits that the Revenue Quebec sample is not representative of its commercial
reality, for the following reasons.
30. The appellant was located in the immediate
vicinity of the Théâtre St‑Denis, at approximately 320 metres.
31. Because of this advantageous location, the
restaurant's is much busier on show nights because most people enjoy evenings
with dinner and a show, and the restaurant had a good reputation; this was not
contradicted by Revenue Quebec.
32. Under the circumstances, the Revenue Quebec sample
was not proportional to the relationship between evenings with a show and
evenings without a show, whereas this is an essential consideration.
33. According to pamphlet A-8, the relationship between
evenings with a show and evenings without a show during the year is as follows,
using the 2001-2002 period as an example:
Table A
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|
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Distribution
over 365 days
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%
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|
Days with show
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211
|
57.808
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|
Days without
show
|
154
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42.192
|
34. The Revenue Quebec
sample is distributed as follows for the same year:
Table B
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|
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Distribution
over 55 days
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%
|
|
Days with show
|
26
|
46.4
|
|
Days without
show
|
30
|
53.6
|
35. It is important to note that the Revenue Quebec
sample for the 2001-2002 period includes 349 days.
36. Since it is rather tedious to determine exactly
which of the 365 days were not used in the sample, and to then determine
whether there were shows on those days, we will use the same ratios established
in Table A:
211 X (349/365) = 202 days
154 X (349/365) = 147 days
37. In fact, the analysis of the survey attached as
Appendix "A" confirms that wine, cocktails and beer consumption was
considerably higher on days with a show:
|
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Average
drinks/day
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|
Days with show
|
15.89
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|
Days without
show
|
5.03
|
38. Using this data to adjust the results of the
Revenue Quebec survey based on days with a show and days without, the reported
consumption would be:
|
|
Year
|
Average
drinks/day
|
Total litres
reported
|
|
Days with show
|
202
|
15.89
|
3,209.78
|
|
Days without
show
|
147
|
5.03
|
739.41
|
|
Total
|
349
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n/a
|
3,949.19
|
39. The difference between litres sold (reported) and
litres not sold (unreported) is therefore significantly modified:
|
Total litres
sold according to RQ
|
4,399.45
|
|
Total litres
reported according to sample adjusted to be representative
|
3,949.19
|
|
Difference
|
450.26
|
|
Previous
difference according to Revenue Quebec, using the
method that does not consider days with a show
|
533.578
|
40. The difference between reported and unreported
alcohol sales is greatly modified under this new method and provides an
explanation for a significant number of litres:
533.578L – 450.26L = 83.318L
(ii)
2002-2003 Period
41. The appellant notes that the difference for the
2002-2003 period is even greater than for the preceding period.
42. The Revenue Quebec
sample is not proportional to the relationship between evenings with a show and
evenings without.
43. According to pamphlet A-8, the relationship
between evenings with a show and evenings without in a year is as follows,
using 2001-2002 as an example:
|
Table A
|
|
|
Distribution for
one year
|
%
|
|
Days with show
|
190
|
52.054
|
|
Days without
show
|
175
|
47.945
|
44. The Revenue Quebec
sample is distributed as follows for the same year:
|
Table B
|
|
|
Distribution
according to RQ sample
|
%
|
|
Days with show
|
21
|
44.68
|
|
Days without
show
|
26
|
55.32
|
45. It is significant to note that the Revenue Quebec
sample for 2001-2002 includes 349 days.
46. Since it is rather tedious to determine exactly
which of the 365 days were not used in the sample, and to then determine
whether there were shows on those days, we will use the same ratios established
in Table A:
190 X (348/365) = 182 days
175 X (349/365) = 167 days
47. According to the analysis of the survey, Exhibit
A-18 confirms that wine, cocktails and beer consumption was significantly
higher on days with a show:
|
|
Average
drinks/day
|
|
Days with show
|
15.47
|
|
Days without
show
|
5.13
|
48. Using this data to adjust the results of the
Revenue Quebec survey based on days with a show and days without, the reported
consumption would be:
|
|
Year
|
Average drinks/day
|
Total reported
litres
|
|
Days with show
|
182
|
15.47
|
,2815.54
|
|
Days without
show
|
167
|
5.13
|
856.71
|
|
Total
|
349
|
n/a
|
3,672.25
|
49. The difference between litres sold (reported) and
litres not sold (unreported) is significantly modified as follows:
|
Total litres
sold according to RQ
|
4,128.05
|
|
Total litres
reported according to sample adjusted to be representative
|
3,672.25
|
|
Difference
|
455.83
|
|
Previous
difference according to Revenue Quebec, per the
method that does not consider days with a show
|
675.539
|
50. The difference between the reported and unreported
alcohol sales is greatly modified under this new method and provides an
explanation for a significant number of litres:
675.539L – 455.83L = 219.709L
(iii) 2003-2004 Period
51. The appellant respectfully submits that the
results regarding the alcohol sold for the 2 preceding periods should be
transposed to the last year.
52. The formula the appellant suggests is:
83.18L explained (2001-2002) + 219L explained
(2002-2003) = 302.889L
Average for 2003-2004: 302.889/2 = 151.445L
53. In light of this, using 151
litres is also clarified, solely for the 2003-2004 period.
54. It is therefore clear that the Revenue Quebec
sample was not representative for the periods in question.
55. At the time the hearing was adjourned in 2007,
Revenue Quebec had stated that it would have an expert
testify to show the accuracy of the audit method used.
56. However, nothing came of it and in the end,
Revenue Quebec did not have an expert witness testify
upon the return of the hearing this week.
57. The appellant notes that the reasonableness of a
sample is not considered judicial notice, and moreover, the appellant has shown
a reality that is its own and the sample used does not reflect its factual
situation.
58. The relevance of the expert witness is clearer
when the many faults revealed are taken into consideration.
59. The appellant refers, in particular, to Brasserie
Futuriste de Laval v. The Queen (book of authorities, tab 7, paragraph
158):
It goes without saying that the gross profit margins
in the restaurant industry, and the pub sector in particular, fall outside
the scope of judicial notice.
If the tax authorities believe that the only way
to determine the sales of a taxpayer whose accounting is deficient and who does
not have the appropriate documents is to mark up its sales by a certain
percentage, they must still show, by means of evidence regarding industry standards or otherwise, and,
if not by an expert, then with statistics, that the markup being applied
is a recognized, reasonable and appropriate standard for the taxpayer's
business.
I cannot accept the submission by counsel for the
Respondent that the presumption of an assessment's validity automatically
carries with it a presumption that all the assumptions on which the Minister
relied to make the assessment are valid and that no evidence of any kind need
ever be offered. The 200%
markup that Ms. Morand used may well constitute a recognized, reliable and
reasonably applicable standard in this case, though I doubt it under the
circumstances. It is also possible that the appropriate markup was 175%, 150%
or even less.
In short, when a taxpayer can raise a serious doubt,
it must be shown that the markup used is not a purely subjective standard, but,
rather, a standard that is objective, reliable and acceptable under the
circumstances. One cannot hide behind the presumption of an assessment's
validity in order to avoid having to offer such evidence. To claim otherwise is
to open the door to arbitrariness by allowing the tax authorities to propound
any theory with the assurance that it would be deemed valid.
Just because a taxpayer has failed to meet its
obligations, has deficient accounting, does not have the appropriate documents,
or has destroyed those documents, does not mean that all assumptions are
warranted and that those assumptions will be deemed valid under all
circumstances.
60. In this context, the appellant respectfully
submits that it has shown that the estimation method used by Revenue Quebec had many flaws that, when considered as a whole, tend
to indicate that the assessments made are unfounded in fact and in law.
[17]
Counsel for the
appellant is essentially claiming that his client made a prima facie
case before the court that demolished the Minister's assumptions when
reconstituting the appellant's sales. He claims that failing in the duty to
keep accurate records and reliable accounting do not give the Minister carte
blanche to rely on arbitrary assumptions when establishing an assessment. In
other words, relying on the decision by Dussault J. in Brasserie Futuriste
de Laval Inc. v. The Queen 2006 TCC 503, he claims that it is not
because the appellant failed in its obligations to keep accurate records, has
deficient accounting or does not have the relevant documents or has destroyed
them that the Minister may assume anything and claim those assumptions are
valid in all circumstances. Counsel for the appellant claims that an appellant
may, using prima facie evidence, demolish the respondent's assumptions,
as L'Heureux-Dubé wrote in Hickman Motors, [1997] 2 S.C.R. 336, at
paragraphs 92 and 93 :
…The Minister, in making assessments,
proceeds on assumptions…and the initial onus is on the taxpayer to “demolish”
the Minister’s assumptions in the assessment …The initial burden is only to
“demolish” the exact assumptions made by the Minister but no more…
This initial onus of “demolishing” the Minister’s exact assumptions
is met where the appellant makes out at least a prima facie case…
[18]
In this case, the
appellant claims to have made a prima facie case that the sampling was
not representative of the commercial reality of the restaurant La Sila, by
showing that the alcohol consumption at its restaurant was much higher on days
when shows were held at the Théâtre St-Denis (days with show) than days when
there were no shows at the Théâtre St-Denis (days without show) and that the
days with show were significantly under-considered in the Minister's sampling,
for each of the years in the period in question.
[19]
Whether or not alcohol
consumption was significantly higher on days with a show in no way indicates,
in my opinion, that the Minister's sampling did not take the appellant's
commercial reality into consideration. In fact, could the alcohol consumption
have been higher during days with show than days without simply because the
appellant's restaurant was busier during days with shows than days without? If
the appellant had made a prima facie case that the sales ratio (net
sales divided by litres of alcohol consumed) on days with a show was
significantly lower than the sales ratio on days without show, if only for one
of the years during the period in question, in my opinion, it would have raised
serious doubt as to the validity of the Minister's sample where days with shows
were significantly under-considered and the burden of proof would have been
reversed. The minister would then have had the burden of showing (probably with
an expert) that his sample was acceptable and reliable considering the specific
circumstances of operating that restaurant. In this case, not only did the
appellant not make this case, but it also admitted that the sales ratio during
days without shows was essentially the same as the sales ratio during days with
shows.
Allowances
Employee bonuses
[20]
The appellant alleges
that it gave its service and kitchen employees 416.5 litres of alcohol during
each of the three years of the period in question, or 238 litres of alcohol
during the lunch shift (an average of four employees who, during the lunch
shift, would have had one 170 ml glass of wine each, for 349 days) and
178.5 litres for the evening shift (an average of four employees who,
during the evening shift would have had one 170 ml glass of wine each, for 350
days). It must be noted that the appellant's evidence in this regard is based
essentially on the testimony of Mr. Iaconetti and Youssef Ouali.
[21]
Moreover, I note that
Ms. Dagenais, whose credibility is not questioned, testified that at their
first meeting on June 2, 2005, Mr. Iaconetti claimed that the appellant did not
offer free alcoholic beverages to its employees during the period in question.
Ms. Dagenais explained that later, Mr. Iaconetti claimed that employees
assigned to the kitchen and service had consumed the equivalent of 297 litres
of wine during the three years of the period in question (an average of five
employees who would have had the equivalent of one 170 ml glass of wine each
per day, for 349 days). Ms. Dagenais added that she included the allowance of
297 litres Mr. Iaconetti declared on behalf of the appellant, despite the
first statement he made that the appellant had not offered any free alcoholic
beverages to its employees during the period in question. Now, the appellant is
asking for such an allocation for 416.5 litres for each of the three years of
the period in question.
[22]
It is definitely not by
changing the version of the facts three times regarding the free alcoholic
beverages offered to employees during the period in question that Mr. Iaconetti
will convince me that the appellant's employees had consumed not 287 litres of
alcohol but 416.5 during each of the three years of the period in question. I
think Ms. Dagenais was being very accommodating and generous towards the
appellant by granting this allowance of 297 litres of alcohol per year
considering the representative's initial statement on the subject.
Wine used in the kitchen
[23]
The appellant claims
that in addition to using "Auberge" and "Entre-Côte "
wines when preparing dishes in the kitchen, its employees had to use other
types of wine when the "Auberge" and "Entre-Côte" types ran
out. The appellant claims that around two one-litre bottles of wine per week
were used in the kitchen, namely one bottle of red wine (valued at around $10)
and one bottle of white wine (valued at around $10). I note that during the
audit, the Minister acknowledged that all the four‑litre sized Entre-Côte
and Auberge brand wines purchased by the appellant during the period in
question were used to prepare dishes in the kitchen; this represented 664.00,
736.00, and 821.00 litres of wine in year 1, year 2 and year 3 respectively,
not considered to have been sold by the appellant during the period in
question. In short, the appellant is asking for an additional allowance of
99.72 litres of alcohol for each of the three years of the period in question.
[24]
The appellant's
evidence on this is based solely on the testimony of Mr. Iaconetti,
Youssef Ouali and Frank Mellace. On this, Mr. Mellace, the appellant's head
chef during the period in question, testified that, on average, he used one one‑litre
bottle of wine per week when preparing dishes. Moreover, Mr. Ouali
testified that he himself brought an average of five or six one-litre bottles
of wine into the kitchen to prepare dishes. Lastly, Mr. Iaconetti
testified that around two one-litre bottles of wine (one red and one white) per
week were used in the kitchen. I note that Ms. Dagenais testified that
Mr. Iaconetti had stated during the first meeting that the appellant only
used "Auberge" and "Entre-Côte" wines in the kitchen.
[25]
In all, the appellant's
testimony was based on three accounts that were rather inconsistent. It is not
by presenting three such inconsistent accounts that the appellant could hope
to convince me it used 99.72 litres of alcohol in the kitchen to prepare dishes
in each of the years of the period in question in addition to the allowance the
Minister already granted in this category. At any rate, it seems unlikely to me
that the appellant had to use an average of two bottles of wine (one litre
format) per week to help out the chefs who had depleted their stock of
four-litre wine. In other words, the appellant is asking me to believe that it
was always out of stock of wine (four-litre format) while Mr. Iaconetti, the
chairperson and main shareholder, performed weekly inventory of alcohol and
went to an SAAQ [sic] outlet many times a week, close to the La Sila
restaurant (in this case, on Maisonneuve) in particular to purchase wine. I
feel that the Minister was very generous towards the appellant by granting
these allowances at the audit; I cannot support this generosity under the
circumstances. For these reasons, the additional allowance requested by the
appellant is simply dismissed.
Grayline party
[26]
The appellant claims it
had a verbal agreement with the company Grayline, under the terms of which it
benefitted from free publicity in Grayline's fliers, in exchange for free meals
(including free alcoholic beverages) offered during the holiday season to
porters invited by Grayline; these superintendants had worked for Grayline
during each of the years of the period in question.
[27]
In this case, I do not
see how the appellant can claim that the alcoholic beverages offered to these
superintendants had not been sold or, in other words, that they were not
taxable supplies. The appellant did not offer free alcoholic beverages to the
superintendants. In fact, the appellant received consideration for this by
benefitting from publicity in the Grayline fliers. The appellant bartered with
Grayline. Therefore, it made a taxable supply by providing the alcoholic
beverages to the superintendants invited by Grayline.
Bonuses for friends and members of the
Iaconetti family
[28]
The appellant claims
that during the period in question:
(i)
nine family parties
were held at the restaurant La Sila;
(ii)
on average,
40 members of Mr. Iaconetti's family, including 5 or 6 children, attended
each of these parties;
(iii)
during these parties,
alcoholic beverages were offered by the appellant for free;
(iv)
each guest consumed an
average of 500 ml of alcohol, less than two beers or around three glasses of
wine.
[29]
The appellant is
requesting an allowance of 50 litres, 57 litres and 45.5 litres
of alcohol for year 1, year 2 and year 3, respectively. I note that the Minister
granted such an allocation of 39.75 litres of alcohol for each of the three
years of the period in question.
[30]
The appellant's
evidence on this is based on the testimony of Mr. Iaconetti and his sister
Cindy Reiss, and a table (Exhibit A‑14, tab 5) indicating the
dates of the parties and the number of people who allegedly attended. I note
that the table is new as of the hearing, and was therefore created using Mr.
Iaconetti's memories since the appellant did not keep any records regarding
these bonuses.
[31]
Mr. Iaconetti
essentially testified that large amounts of alcohol were consumed at the
appellant's expense during these nine family parties. Mr. Iaconetti explained
that he estimated each guest consumed 500 ml of alcohol (beer and wine).
Mr. Iaconetti's sister reported that she attended nine of these family
parties. She also said the alcohol (beer and wine) had been offered for free
during these nine parties. Lastly, Mr. Iaconetti's sister-in-law essentially
testified that she attended four of the nine family parties. She also stated
that alcohol was offered by the appellant during these four family parties.
[32]
Counsel for the
appellant, relying on 9022‑8891 Québec Inc. v. R., 2006 G.T.C. 214
claims that the testimony of the appellant's director, uncontradicted and
moreover corroborated by the testimony of his sister and sister-in-law,
constitute a prima facie case sufficient to reverse the burden of proof.
In 9022‑8891 Québec Inc., which also addressed the issue of
unreported alleged sales made in the operation of a bar, the auditor set the
proportion of alcoholic beverages lost and used for promotions at 10% of total
sales, whereas the appellant claims it was 30% of the total sales. The Court
allowed the appeal, having accepted the testimony of the appellant's senior
director.
[33]
Here, the testimony
given by Mr. Iaconetti was corroborated by the testimony of witnesses who
cannot be qualified as independent witnesses; at any rate, these accounts did
not shed any light on the amounts of alcohol consumed or how many people
attended these family parties. Mr. Iaconetti's testimony was not supported by any documentary evidence such as a database with
the names of the guests who attended each of the family parties, the amount of
alcohol consumed and the nature of that alcohol. Mr. Iaconetti's testimony
cannot be considered reliable since he was rather vague and inaccurate. Mr.
Iaconetti used the words "I estimate" and "around"
regarding the amounts of alcohol consumed a little too often. In general, the
appellant's evidence on this subject does not create the degree of probability
required for a prima facie case. I feel that the allowance the Minister
granted as such was more than reasonable in the circumstances.
[34]
Moreover, I note that
regarding the decision raised by counsel for the appellant that, even if the
judge had indicated that the testimony of the senior director of the appellant
had not been corroborated, the appellant did in fact present a book proving the
promotional activities carried out by the bar, and the judge accepted this in
support of the testimony.
Bonuses for VIP members
[35]
Counsel for the
appellant claims that his client gave its clients (to whom it had sent VIP
member cards) 47.74 litres of beer and 214.20 litres of wine in each of the
three years of the period in question. However, counsel for the appellant only
requested an allowance on behalf of his client for 250 litres of alcohol (wine
and beer) for each of the three years of the period in question. I note that
during the audit, the Minister had admitted that the appellant gave its clients
with VIP member cards 22.08, 33 and 30.87 litres of beer in year 1, year 2 and
year 3 respectively. Moreover, during the audit, the Minister did not
acknowledge that the appellant gave glasses of wine to its VIP cardholders
during the period in question.
[36]
The appellant's
evidence in this regard is essentially based on the testimony of Mr. Iaconetti,
his sister Giovanna, Youssef Ouali and a few clients (Normand Yergeau and
Antoine Donato). Moreover, the appellant submitted to evidence the invoices
related to the purchase of VIP cards (Exhibit A-14, tab 4), a list of
VIP members (Exhibit A-14, tab 2), the evaluation card VIP members
filled out (Exhibit A-14, tab 1) and the letter (to which the membership
card was attached) that the appellant sent to its clients who had completed the
evaluation card (Exhibit A-14, tab 3).
[37]
Mr. Iaconetti testified
that:
(i)
as soon as the
appellant acquired the restaurant La Sila, it used alcohol as a promotional
tool and offered a free glass of wine or beer to all its clients that became
V.I.P. members of the restaurant. Mr. Iaconetti explained that to become a
V.I.P. member, a client merely had to fill in an evaluation card for the
restaurant, which was given out after the meal; then the appellant sent a
letter by mail (Exhibit A‑14, tab 1), with a numbered V.I.P.
member card and another V.I.P. member card (with the same number) in the
spouse's name as it appeared on the evaluation card. I note that the letter
essentially explains the conditions for activating the V.I.P. card and the
advantages it gives to the holder. From the letter, I note that the holder of
the V.I.P. card who has completed the evaluation card could enjoy the bonus (a
glass of wine or a beer) by taking the V.I.P. member card and the letter to the
restaurant within three months of receiving it. Mr. Iaconetti explained that he
had distributed around 9,000 member cards during the period in question,
around 6,000 of which were to clients who had filled in the evaluation card and
around 3,000 to their spouses. The appellant submitted three invoices to
evidence in this regard (Exhibit A‑14, tab 4) that show it
purchased a batch of 5,000 V.I.P. member cards on October 11, 2001,
another of 5,000 cards on December 23, 2002, and a last batch of 5,000 on
October 4, 2004;
(ii)
around
5,000 clients (who had filled in the evaluation card) brought back the
letter giving them the right to the bonus. Among them, 90% preferred the free
glass of wine to a free beer. I immediately note that counsel for the appellant
claimed in his arguments that around 1,400 of the appellant's clients had
enjoyed a free beer or glass of wine under this V.I.P. promotion, for each of
the years of the period in question;
(iii)
the evaluation cards,
once completed, were given to his sister Giovanna who then sent the letter and
V.I.P. member cards by mail to the clients who had filled them in. Mr.
Iaconetti explained that his sister had kept a database with all the names of
the clients who had completed the evaluation cards, the names of their spouses,
their address and membership number. The appellant submitted a list to evidence
(Exhibit A-14, tab 2) with all the above-noted information, but this list had
been printed on September 29, 2007;
(iv)
he had given his sister
all the letters the clients had brought back to the restaurant to use the bonus
offered during the promotion. Mr. Iaconetti explained that his sister wrote the
number of the member who brought the letter back on the letter, by hand. Mr.
Iaconetti added that his sister kept these letters at her home.
[38]
Giovanna Iaconetti
essentially repeated her brother's testimony regarding her role in the V.I.P.
promotion. Moreover, Youssef Ouali (a server for the appellant during the
period in question) testified that an average of 5 to 7 clients per week gave
him a letter during the period in question in order to enjoy the bonus offered
by the appellant under the V.I.P. promotion.
[39]
Counsel for the
appellant states that his client made a prima facie case that under the
promotion, it had given 214.20 litres of wine in each of the three years of the
period in question, to clients holding V.I.P. member cards who brought back the
letter in question.
[40]
In Stewart v. M.N.R.,
[2000] T.C.J. No. 53, paragraph 23, Cain J. states that "[a] prima facie case is one supported by evidence
which raises such a degree of probability in its favour that it must be
accepted if believed by the Court unless it is rebutted or the contrary is
proved." In my opinion, the evidence submitted by the appellant regarding
this promotion was much more substantiated than that related to the other
allowance requests. Mr. Iaconetti's corroborated and uncontradicted testimony,
while unclear as to the exact quantities of wine given out during this
promotion, was supported by sufficient documentary evidence (a list of names of
V.I.P. members who had completed an evaluation card, the name of their spouse
where relevant, their address and membership number, letters that were brought
back by the clients to enjoy the bonus offered under the promotion and invoices
related to the purchase of 15,000 membership cards) created, in my opinion,
such a degree of probability in favour of the appellant that the Court must
consider the evidence submitted by the appellant on this subject as a prima facie case.
[41]
For these reasons, I
feel that the GST assessed must be reduced by the following additional amounts:
$2,102.70 for year 1 (($140.3697 x 214.20 litres) x (7 %)),
$2,199.00 for year 2 (($146.6592 x 214.20 litres) x (7 %)) and $2,279.68
for year 3 (($152.04 x 214.20 litres) x (7 %)).
Bonuses for the best clients who were not
V.I.P. members
[42]
The appellant claims
that it gave its best clients around 100 750 millilitre bottles of wine per
year. It therefore asks for an annual allowance of 75 litres of alcohol.
[43]
I immediately point out
that further to the appellant's initial observations on this subject on
November 3 and 9, the Minister granted an annual allowance of 30 litres of
alcohol (or 40 750 millilitre bottles of La Fonte wine). When these initial
observations were presented, the appellant submitted a letter to the Minister
(Exhibit I-10) that indicated it had offered 40 of its V.I.P. members a free
bottle of La Fonte wine. Now, the appellant is claiming it also gave out around
60 bottles of wine to its best clients, who were not even V.I.P. members.
[44]
The appellant's
evidence on this subject relies solely on the testimony of
Messrs. Iaconetti, Ouali (one of the appellant's servers) and Yergeau (one
of the appellant's clients). I will note that the appellant did not keep a
record of these bonuses.
[45]
Mr. Iaconetti's
testimony on this could be summarized as follows: he and the appellant's
servers gave the appellant's best clients who were not V.I.P. members around 60
bottles of wine. I must note that Mr. Iaconetti's testimony does not make
reference to:
(i)
the name of the clients
who allegedly benefitted from such a bonus;
(ii)
the brand of the wine
given and, as a result, of the cost of the wine given, only that, in year 1,
the cost of a bottle of wine given was between $25 and $50 (see May 5, 2009,
transcript, at paragraph 77);
(iii)
the number of bottles
of wine each of the servers gave out.
[46]
Moreover, Mr. Ouali's
testimony told us little on the subject other than he had given 15 to 25
bottles of wine to his best clients per year.
[47]
Finally, Mr. Yergeau,
one of the appellant's good clients, simply said that he had occasionally
received a bottle of wine from the appellant.
[48]
In this case, the
appellant claims to have made a prima facie case that it gave around 60
bottles of wine per year to its best clients who were not V.I.P. members (this
represents an annual allowance of 45 litres of alcohol). In my opinion, the
evidence submitted by the appellant on this subject did not create a sufficient
degree of probability to be considered a prima facie case. First, Mr.
Iaconetti's testimony was not supported by adequate documentary evidence such as
a database with the names of those who benefitted from this promotion, the date
the bonuses were received and the type of wine given as such. Moreover, Mr.
Iaconetti's testimony cannot be considered reliable because he was deliberately
vague and unclear. The word "around" was used to qualify his
statements too often. Also, the testimony given by Messrs. Ouali and Yergeau do
not really support Mr. Iaconetti's testimony because they were as vague and
unclear (and therefore unreliable) as Mr. Iaconetti. The appellant must know
that evidence based on uncontradicted testimony or even on testimony
corroborated by other testimony does not necessarily create the degree of
probability required to be considered a prima facie case. Overall, the
appellant is asking me to make a somewhat arbitrary decision, which it
criticized the Minister of doing many times. For these reasons, I feel the
Minister was within his right to disallow the allocation for 40 litres of
alcohol the appellant requested.
Bonus for porters
[49]
The appellant claims
that it gave Montréal hotel porters 26.25, 43.1, and 70.2 litres of wine in
year 1, year 2 and year 3 of the period in question, respectively. The Minister
disallowed all such claims. The appellant's testimony is essentially based on
many tables (see Exhibit A-14, tab 6) (created by the appellant for the
purposes of this case) that indicate the names of the porters who received
these bonuses and the date they allegedly received them. I note that the tables
are supported by receipts (see Exhibit A-14, tab 6)
that the porters allegedly signed.
[50]
Mr. Iaconetti testified
that:
(i)
he had a verbal
agreement with porters (one or two per hotel) that worked at five or six hotels
in Montréal, under the terms of which they could have a free meal and free
bottle of wine (valued at around $10) per month if they distributed coupons
from the restaurant La Sala to clients at their hotels;
(ii)
he made sure these
porters only used the bonus once a month;
(iii)
the porters had to sign
a receipt related to the bonus.
[51]
Mr. Greiss testified
that he entered into an agreement with the appellant that was similar to that
described by Mr. Iaconetti at the time he worked as a porter at the Grand Plaza
Hotel in Montréal. I note, however, that Mr. Greiss did not recall the
frequency agreed to for the bonuses.
[52]
Mr. Iaconetti's
uncontested testimony was supported this time by documentary evidence that I
feel is reliable (even though the Minister noted that the table related to the
bonuses granted to Mr. Greiss had a four-litre error regarding the November 4,
2004, invoice) and by independent and credible testimony. In other words, the
evidence the appellant submitted on this subject created the degree of
probability required for it to be a prima facie case. As a result, I
feel that the appellant has the right to an allowance of 26.25, 42.31 and
65.2 litres of alcohol for year 1, year 2 and year 3, respectively. As a
result, I feel that the GST assessed must be reduced by $1,386.19, or $257.92
in year 1 (($140.3697 x 26.25 litres) x (7 %)), $434.36 in
year 2 (($146.6592 x 42.31 litres) x (7 %)) and $693.91 in
year 3 ($152.04 x 65.2 litres).
Disallowed ITC
[53]
As we saw, the ITC was
reduced by $4,096.08 in the Minister's assessment. From Exhibit I-8, we see
that the disallowed ITC were in reference to the following expenses, that the
Minister did not consider were incurred in the course of its commercial
activities:
|
(i) Employee bonuses
|
297 litres
|
|
(ii) Owner drinks
|
41.65
litres
|
|
(iii) Baptism and personal bottle
|
35.25 litres
|
|
Total litres disallowed
|
373 litres
|
From Exhibit I-8, I note that the Minister used the
value of the inventory according to the appellant's accounting records to
determine the value of the disallowed litres. The Minister's calculation
indicates he valued 373 litres at $19,505.20, or $52.29 per litre.
[54]
First, we shall address
the issue of whether the value of these 373 litres is $19,505.20. On this, I
refer to Mr. Iaconetti's testimony that the appellant gave its employees and
family members and friends Giacondi brand wine, the cost of which was around
$10 a litre. Moreover, I cannot easily explain why the Minister used the value
of the inventory according to the appellant's accounting records. In fact, it
is illogical, to say the least, that the Minister would use the appellant's
books to determine the value of the litres of alcohol given and at the same
time claim that the accounting, accounting books and financial records were
very deficient. It is therefore not surprising that the use of this deficient
accounting led to results that are rather unlikely and unrealistic. In other
words, I am not convinced that the appellant gave its employees and family
member wine valued at $52.29 a litre. Mr. Iaconetti's testimony on this seems
more believable and likely.
[55]
We will now examine the
issue of whether the appellant's expenses related to these bonuses entitled it
to claim the ITC.
[56]
Subsection 169(1) of
the Act sets out the general rule for ITC. This provision provides that any
property or service acquired or imported by a registrant for use in the course
of their commercial activities entitles that to claim ITC in proportion to the actual
or projected use of that property in the course of their commercial activities.
The provision states:
169.(1) Subject to this Part, where a person acquires or imports
property or a service or brings it into a participating province and, during a
reporting period of the person during which the person is a registrant, tax in
respect of the supply, importation or bringing in becomes payable by the person
or is paid by the person without having become payable, the amount determined
by the following formula is an input tax credit of the person in respect of the
property or service for the period:
A × B
where
A is the tax in respect of the supply, importation or bringing in,
as the case may be, that becomes payable by the person during the reporting
period or that is paid by the person during the period without having become
payable; and
B is:
(a) where the tax is deemed under subsection 202(4) to have been
paid in respect of the property on the last day of a taxation year of the
person, the extent (expressed as a percentage of the total use of the property
in the course of commercial activities and businesses of the person during that
taxation year) to which the person used the property in the course of
commercial activities of the person during that taxation year,;
(b) where the property or service is acquired, imported or brought
into the province, as the case may be, by the person for use in improving
capital property of the person, the extent (expressed as a percentage) to which
the person was using the capital property in the course of commercial
activities of the person immediately after the capital property or a portion
thereof was last acquired or imported by the person, and
(c) in any other case, the extent (expressed as a percentage) to
which the person acquired or imported the property or service or brought it
into the participating province, as the case may be, for consumption, use or
supply in the course of commercial activities of the person.
[57]
The term
"commercial activity" is defined at subsection 123(1) of the
Act, which states:
"commercial activity" of a
person means
(a) a business carried on by the person (other than a business
carried on without a reasonable expectation of profit by an individual, a
personal trust or a partnership, all of the members of which are individuals),
except to the extent to which the business involves the making of exempt
supplies by the person;
(b) an adventure or concern of the person in the nature of trade
(other than an adventure or concern engaged in without a reasonable expectation
of profit by an individual, a personal trust or a partnership, all of the
members of which are individuals), except to the extent to which the adventure
or concern involves the making of exempt supplies by the person, and;
(c) the making of a supply (other than an exempt supply) by the
person of real property of the person, including anything done by the person in
the course of or in connection with the making of the supply.
[58]
As a result, the
question I must answer can be stated as follows: were the appellant's expenses
related to the bonuses incurred when carrying out its commercial activities? In
my opinion, the litres of wine enjoyed by Mr. Iaconetti (41.65 litres in each
of the periods in question) and his family and friends (35.25 litres in
each of the periods in question) were clearly not consumed or used when
carrying out the appellant's commercial activities. Moreover, in light of the
teachings of Campbell J. in General Motors of Canada Ltd. v. R., [2008]
G.S.T.C. 41 (T.C.C.), I feel the appellant's expenses related to employee
bonuses were incurred when carrying out its commercial activities and the
company used these bonuses to solidify employee morale, maintain good relations
with them and ensure their loyalty, all elements that contributed to the
success of the restaurant La Sila. In other words, the costs associated to the
employee bonuses can be considered only indirectly linked to the operation of
the restaurant but still an integral part of the general commercial success of
the restaurant. The costs related to the bonuses the employees received are, in
my opinion, part of the appellant's commercial activities and they meet the
need to attract and keep the number of employees required for the proper
operations of the activities. In my opinion, the fact that the advantages
granted to the employees were not added to their employment income is not
relevant to determining the issue in question.
[59]
As a result, I feel
that the appellant is entitled to the additional ITC of $3,218.80, in that the
ITC in the assessment should have been reduced by $877.37 ((79.90 litres x
$52.29 x 3) x (7 %)) rather than by $4,096.08.
Penalty
[60]
With regard to the
penalty imposed on the appellant under subsection 280(1) of the Act, I
note that the appellant did not submit any evidence that showed
Mr. Iaconetti did his due diligence. I add that counsel for the appellant
did not even address this issue in his arguments. As a result, I must find that
the Minister was within his right to impose the penalty in application of
section 280 of the Act.
Conclusion and costs
[61]
For all these reasons,
the appeal from the assessment made December 7, 2005, is allowed, to take into
consideration the Minister's admission as stated at paragraph 3 and in my findings
at paragraphs 41, 52 and 59. The GST claimed by the appellant should be
increased by $11,947.21 rather than by $25,256.32, the ITC should be
decreased by $877.37 rather than by $4,096.08, with consequential adjustment of
penalties and interest.
Signed at Ottawa,
Canada, this 28th day of October 2009.
"Paul Bédard"
on this 21st day
of December 2009.
Elizabeth Tan,
Translator
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