Citation: 2007TCC759
Date: 20071220
Docket: 2004-1580(GST)G
BETWEEN:
9030-2340 QUÉBEC INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Lamarre Proulx J.
[1] This is an appeal from a reassessment made for
the period from April 19, 1999 to April 30, 2000, under the Excise Tax Act (the
Act). The notice of reassessment is dated March 9, 2001, and bears
number PA00S0000266.
[2] The issues concern the determination of the
amount of taxable supplies of the appellant from its restaurant and the assessment
of the penalty under section 280 of the Act.
[3] Mr. Stavropoulos, the principal shareholder
of the appellant, testified. He explained that, at the time, he was the appellant's
operations manager. The appellant operated a restaurant called Le Jardin
d’Aphrodite. This 175-seat restaurant offered buffet meals at noon and in the
evening. The prices varied depending on whether it was noon or evening or a
weekday or weekend.
[4] Mr. Stavropoulos' partner,
Emmanuel Bitsakis, was in charge of accounting. He did not testify. There is
apparently at present a disagreement between the two.
[5] The witness admitted that there was no cash
register. He explained that, at the beginning of their shift, the waitresses
had a certain amount of money and their order pads. When the bill was paid in
cash, they took the money and handed it over. For bills paid by credit card,
they used credit card machines. At the end of their shifts, the waitresses themselves
added up the total bills, or the take. They put the bills in an envelope with
the money and the calculator ribbon.
[6] Mr. Stavropoulos’ partner, Mr. Bitsakis,
made the deposits. There was an accountant who came once a month.
[7] The witness described certain facts in order to
show that the alcohol purchased was not all sold to patrons and that there were
significant losses. He stated that, at the end of a workday, he might invite
the employees who were there to have some wine with him. There might be breakage
of bottles or 20-litre containers. When he could not hold reservations for
patrons he sometimes offered them a glass of wine. Sometimes as well he offered
patrons a digestif to please them and encourage them to return. With regard to
the wine used in the kitchen, he said that at least two 20-litre containers went
into the preparation of meals each week.
[8] The waitresses themselves filled the carafes and
wine glasses at one of the two bars.
[9] At the end of the day, any food that was still
good was sent to charities.
[10] A cook, François Parent, testified that
he had worked at the restaurant since 1999. He stated that at least 35 or 40
litres of wine were used in the kitchen every week.
[11] Annie Perrault is also a cook but is in charge of
the buffet staff as well. She confirmed that Mr. Stavropoulos would
sometimes offer patrons wine and spirits at the end of the day.
[12] Nathalie Masse is a waitress. She stated that
they always put a little extra wine in the carafes. For example, 1100
millilitres were poured into the one-litre carafes, 600 millilitres into the
500-millilitre carafes and 230 millilitres into the glasses.
[13] Maurice Mailloux is a tax accountant. He
testified as an expert. The important elements in his analysis were two tables. In fact, he used the
tables prepared by the auditor and modified them. One table is entitled [TRANSLATION]
"Calculation of Sales and Taxes Owing" for the period from April 19,
1999 to March 31, 2000, and the other bears the same title except that it is
for the period from April 1 to 30, 2000. Sales and taxes owing were calculated
for those two periods because, according to the auditor, at the time of the
audit the appellant had not yet decided on its fiscal year.
[14] I believe that it is
essential to the understanding of this case to reproduce the auditor's tables
and the corrections made to them by the expert. I will show the corrections in
parentheses and in bold. (See Tables 1 and 2, attached hereto.)
[15] Since the accounting
was flawed, the auditor used a survey method. The bookkeeping was more or less non-existent; there
was no cash register and no date on the bills; a number of bills were missing
and there were errors in the financial statements.
[16] The auditor first
determined the amounts for purchases of beer, wine and spirits using
information from the third-party suppliers, namely, brewers and the SAQ, as well as from the appellant's
accounts. These purchases were determined by quantity or in dollars. The
auditor then established, by means of a survey based on 7,200 bills, average
wine sales in relation to food sales. This proportion was 8.25%. From the cost
of the wine, she deducted the wine used in the kitchen. She marked up the
remaining wine and allowed a percentage for breakage. The resulting figure was
considered to represent 8.25% of sales.
[17] The appellant does
not dispute the amount of the purchases. It does challenge the allowance for breakage or other
losses and for the volume of wine used in the kitchen; nor does it challenge
the mark-up on spirits. On the tables attached hereto, the figures proposed by
the appellant’s expert are shown in parentheses and in bold.
[18] At the hearing there
was some discussion on the use of the proportion of alcohol purchased as
opposed to the proportion of wine purchased to determine the sales of meals.
The auditor explained that she took the percentage of wine because she found
this proportion more advantageous for the taxpayer. The proportion of 8.25%
(wine) gave $1,733,000 while the 14.07% rate (alcohol) gave $1,794,000. If I
understood correctly in the end, there were no longer any submissions being
made by the appellant in that respect.
[19] As the tables show,
the first two kinds of sales — of bottled beer and imported beer — were not changed.
[20] With respect to the
next three types of sales — draft beer (glasses), draft beer (half pitchers)
and draft beer (pitchers) — the expert changed the amount allowed for breakage
or loss from 5% to 10%.
[21] The auditor
explained that she reduced the mark-up determined by the survey, after
discussion with Mr. Bitsakis, to take into account a promotional scheme
that the appellant said it had put in place at the beginning of its operations.
The price for draft beer by the glass was lowered from $2.94 to $2.49, a
half-pitcher went from $6.95 to $5.91 and a pitcher from $12.95 to $10.97.
According to the auditor, it is therefore not necessary to increase the
allowance for breakage since the mark-up has been lowered.
[22] She admitted at the
hearing that now, in light of the case law, the allowance for breakage and loss
is set at 8%.
[23] Taking the statements of
wine purchases prepared by the auditor, at the hearing the expert arrived at a
unit figure per 20-litre container of wine of $119. The auditor had arrived at a
figure of $110. However, there was, at the hearing, no explanation of how the
unit price had been determined.
[24] The expert took 1.75
20-litre containers per week as the quantity of wine used in the kitchen. Since
the unit price was changed somewhat at the hearing, the total wine used in the
kitchen, in Table 1, would be $10,412.50 and not $10,671.50. The amount indicated
by the auditor is $8,250. The auditor had allowed 1.5 20-litre containers at a
cost of $110 per container.
[25] For Table 2,
the expert assigned an amount for wine based on his percentage and the unit
price.
[26] The expert proposed
a rate of 10% for breakage and loss. The auditor explained that the 219.25% mark-up
for the wine was originally 243.57%. She took into account the promotional
scheme described by the appellant, a scheme for the existence of which she
ultimately never had any evidence. Thus, for the one-month period in Table 2, for
which she did not allow anything, the mark-up was in fact 243%.
[27] With regard to
spirits, the expert, relying on an ambiguous note by the auditor to the effect
that she had not marked up the spirits, indicated "zero" as the
mark-up. The auditor explained what she meant in saying in her report that she
had not marked up spirits. She explained that, according to her survey, the
mark-up would have been about 400%, but since the volume of spirits was not
very great, she accepted the 350% the mark-up indicated by the taxpayer.
[28] Therefore, in his report, the expert put "zero"
as the mark-up for spirits on the two Tables. Furthermore, he replaced the 3%
allowance for loss with an allowance of 10%.
Analysis and conclusion
[29] I must say at the outset that what the expert
witness said in this last regard discredits his report and betrays a
misunderstanding of the role of an expert witness in a court of law. An expert
must, as far as possible, be an objective and impartial witness because he must
enlighten the court with regard to the interpretation of the facts in his area
of expertise. The expert based the zero mark-up on an ambiguous comment by the
auditor. He should have established the mark-up on the basis of what was done
at the restaurant or the mark-up shown on the bills. It is clear that the appellant
is in business and does not sell spirits at cost.
[30] I shall now decide
each of the points at issue, beginning with the allowance rates.
[31] Counsel for the appellant referred to the decision
of the Court of Québec in Restaurant Barolo Inc. c. Québec (Sous‑ministre
du Revenu), 2007 QCCQ 316, and, in particular, to paragraph 38 of that
decision:
[translation]
38 In the
case at bar, the Court accepts the testimony of Roony Messina, the plaintiff's
accountant, that "standard" losses in the restaurant business are on
the order of 5% to 8%, which testimony is corroborated by
Madeleine Lemire, CA, who has a master's degree in taxation. Ms. Lemire's
testimony, supported by an expert's report, was that the method used in
California and, in particular, by the State Board in its examinations and its audit
manual, permitted an 8% allowance with respect to wine to take account of
losses generally, including kitchen use, staff use, gifts to patrons and losses
of all kinds.
[32] According to that
decision, an 8% allowance can be used for losses generally, including kitchen use,
staff use, gifts
to patrons and losses of all kinds. The auditor stated at the hearing that this
percentage is the one now used in audits. I find the Barolo decision to
be well-founded.
[33] With respect to
Table 1, the auditor has already reduced the mark-up for the various kinds of
sales so as to take the promotional schemes into account. There was no conclusive
evidence of these schemes. I therefore see no reason to increase the allowance
rates. For Table 2, the rate should be 8% for each type of sales, since the use
of wine in the kitchen, gifts to patrons and other losses were not taken into
account by the auditor in the preparation of this Table.
[34] What of the
proportion of the wine shown in Table 1 that was used in the kitchen? One witness, who had been a cook for a
long time, told the Court that 35 to 40 litres of wine were used each week. I
therefore accept the proportion proposed by the appellant's expert, namely,
1.75 20-litre containers of wine per week, and I also accept his unit price of
$119. Hence, the total amount of wine, which is $78,377.15 in Table 1, should
be reduced by $10,452.
[35] The sales of wine thus determined will be 8.25% of
total sales.
[36] With regard to
spirits, the mark-up proposed by the auditor is accepted.
[37] Concerning the assessment
of the penalty under section 280 of the Act, there is really no reason to cancel
it. The bookkeeping was such that the Minister of National Revenue could not
rely on it to establish the amount of taxable supplies. There is no evidence of due diligence in the
circumstances of this case.
[38] The appeal is
allowed, without costs, to the extent indicated above.
Signed at Ottawa, Canada, this 20th
day of December 2007.
“Louise Lamarre Proulx”
Translation
certified true
on this 27th day of June 2008.
Erich Klein, Revisor
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