Citation: 2007TCC365
Date: 20070710
Docket: 2005-2224(GST)I
BETWEEN:
9010-9869 QUÉBEC INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] This is an appeal
from an assessment made under the Excise Tax Act
("the Act") in respect of Goods and Services Tax (GST), bearing
the number 4‑17‑5126 and dated March 30, 2005, for the
period from November 1, 1996, to October 31, 2000.
[2] The Respondent
framed the issues as follows:
(i) the
amount of tax on unreported sales (purchases plus mark‑up), the
Respondent having determined that this amount was $79,338; and
(ii)
the amount of input tax credits (ITCs) that are disqualified because of the
definition of "recipient", the Respondent having determined that this
amount was $84,318.
[3] The Appellant
operates a business that sells and rents videocassettes and electronic games.
The Appellant also acts as a kind of wholesaler to several small businesses in
the neighbourhood. The Appellant also leased commercial buildings.
[4] In the course of
its business, the Appellant engaged in numerous transactions, several of which
had characteristics specific to this field. It purchased, resold, and
rented out movies and video game cartridges. The prices varied widely, notably
based on quality, but also based on the customers and the equipment. Moreover,
there were discounts, free cassettes and various promotions to stimulate sales.
[5] In view of the
number and wide variety of different transactions, it would have been helpful
and perhaps even essential to have an adequate accounting system allowing all
transactions to be properly identified.
[6] The Appellant argued
emphatically that it had implemented such accounting, and that the information
thereby entered was sufficient to answer all questions reliably, not only in
order to meet its obligations as a GST collection agent, but also in order to
allow it to claim and obtain the ITCs to which it was entitled.
[7] According to the
Notice of Appeal, the Appellant's accounting system was beyond reproach. I
shall reproduce, inter alia, paragraphs 4, 5, 8 and 20 of the Notice of
Appeal.
[TRANSLATION]
(4) The
justifications and supporting documents supplied by the Appellant should have
been satisfactory to the auditor and should have convinced him not to employ
this alternative method.
(5) Indeed, the
supporting documents and/or invoices that were required for his audit have
always existed and always been available.
. . .
(8) In
point of fact, the Appellant kept such records, and retained such documents in
support of the information in those records, as would enable the auditor to
determine, corroborate or correct the amounts to be deducted, withheld,
collected or paid under tax legislation.
. . .
(20) The accounting
procedure used by the Appellant was supervised and approved by a tax auditor,
who spent nine (9) months in the business during the year 1996.
[8] The same Notice of
Appeal discusses another reality, however:
(6) Actually, the
auditor provides another justification for relying on this method: He says that
he noticed that there were several invoice numbers missing, because,
insofar as his other observations were concerned (such as calculation
errors, invoices entered twice, mistakes in adjusting entries or
retranscriptions, or omissions) the auditor was able to trace them and correct
them, thereby resulting in his determination that the Appellant had remitted
too much tax.
(7) And yet,
after the Appellant provided explanations and supporting documents, the auditor
was able to see that what was missing were invoice numbers, not actual
invoices, and that these numbers had never been used for the purpose of billing
anything at all.
[Emphasis added.]
[9] The Notice of
Appeal refers to grievances, errors or lapses attributable to the Respondent.
Consistent with its Notice of Appeal, the Appellant devoted most of its energy
at the hearing to efforts aimed at proving that the auditor was responsible for
numerous lapses and mistakes during his audit. In fact, a reading of the Notice
of Appeal makes this very clear:
[TRANSLATION]
(3) First of all,
the Appellant objects to the tax auditor's use of an alternative method,
described in subparagraph 2(a), for reconstructing the sales through the use of
purchases. The Appellant considers this decision unjustified and adds that it
is faulty because the results obtained were erroneous, unreasonable and
unrealistic.
. . .
(8) In point of
fact, the Appellant kept such records, and retained such documents in support
of the information in those records, as would enable the auditor to determine,
corroborate or correct the amounts to be deducted, withheld, collected or paid
under tax legislation.
(9) The
auditor certainly cannot fault the Appellant on its inventory‑keeping,
considering that he personally determined that the rental and consignment
returns, and several buybacks, were later sold in batches for next to nothing
due to their rapid depreciation.
(10) Moreover, upon
analysing the auditor's work in determining the profit margins that were used
to mark up the purchases in accordance with his alternative method, one sees
that the auditor made several mistakes and takes no account of the reality of
the Appellant's business for the following reasons:
(a) The auditor
uses the cost of buybacks to increase the Appellant's profit margins, and at
the same time, its sales, whereas those buybacks should be applied to reduce
sales, and, naturally, reduce the profit margin.
(b) The auditor
uses movie rentals to increase profit margins when in fact they cause the
Appellant a substantial loss.
(c) The sampling
used by the auditor is in no way representative of the Appellant's true
situation, as it does not take account of the fact that, for the years in
issue, 57-64% of the sales are made to customers at a heavy discount which
yielded profit margins below 3% (e.g., Accommodation Tupper, 1%).
(d) The use of
samples which do not reflect the true situation of the Appellant's business
produces biased results.
(e) The small
sample size results in imprecise estimates which, in turn, lead to profit
margin calculations that are appreciably off the mark.
(f) The
auditor did not take into consideration the fact that films not sold within a
short time of their release dates are systematically discounted. After just one
week, new movies depreciate by almost 30% of the price set by distributors.
(g) The Appellant
accounts for his sales and expenses on a net basis in relation to the cost of
the goods sold.
(h) Rental and
consignment revenues are accounted for when the customer pays. The movies are entered
as expenses.
(i) Since
the selling price of movies is controlled by the major distributors, it is
unrealistic to impute such large profit margins to the Appellant, especially
since, as the auditor was able to see, all the purchase invoices were
available.
All of these points compromise the
auditor's assessment and confirm that it is unreasonable to found a claim on
such work given the mistaken premises on which it is based.
(11) During
the audit, the Appellant showed the auditor that his approach was biased by
taking each of the invoices, coding them and grouping them by category in order
to create a sample structure that was representative of his business. Although
this work showed the auditor that the results he arrived at were erroneous, the
auditor did not see fit to consider this work done by the Appellant.
(12) The profit
margins established by the auditor are simply illusory and inconsistent with
reality, especially since they would represent more than one million dollars in
additional sales, a completely unrealistic and unthinkable figure, as the
auditor was undoubtedly able to see.
(13) The auditor's
findings with respect to the profit margins are quite simply based on
methodology that is too weak to be relied upon.
. . .
(15) The Objections
Directorate of the tax authority says that it realizes that the results
obtained are probably different from reality.
. . .
(19) The tax
authority's inconsistency is certainly flagrant in that, on the one hand, the
Appellant's sales are marked up by using purchases and yet, on the other hand,
those same purchases are disallowed because the Appellant does not meet the
definition of "recipient".
[10] For her part, the
Respondent said that it was not possible to conduct an audit using the
traditional and direct method, which consists of obtaining all the relevant
data and documents, analysing them, and arriving at a valid, reliable and
probative result.
[11] The Respondent made
the following arguments, among others, to justify resorting to the alternative
method:
·
The
Appellant's accounting system was so deficient that it did not allow total
sales to be determined.
·
The
Appellant's accounting system was also deficient in that there was no way to
ensure that all invoices were entered because the audit showed that some
invoices were entered twice and that a great many invoices were never entered.
·
The
accounting system was deficient because it did not reflect all of the
Appellant's business activities.
·
There
were more than 15 irregularities, some major. These irregularities made it
impossible to do an accounting that was in keeping with standard practices.
[12] This lack of an
adequate accounting system that conformed to standard practices is, in fact,
quite well borne out by the testimony given by the auditor on
June 13, 2006, and recorded at pages 21 to 23 of the transcript at
questions 31 et seq.:
[TRANSLATION]
Q. So we may come
back to that in detail. But for now, with respect to the accounting system, you
had a few problems with the accounting system. Is that right?
A. Well, I saw that
instead of using a standard accounting method, that is to say, a method where
each of the invoices is systematically entered when produced, I saw right away
that Mr. Boudreau was entering sales in the books by batch. So
Mr. Boudreau explained to me that he transcribed invoice amounts and
numbers into a Lotus spreadsheet program … um, the amounts and invoice numbers
appearing on the sales invoice.
Then,
for each month, he totalled what he had compiled. Mr. Boudreau told me
that in order to do this work, he used the invoices that Mr. Veilleux gave
him. He explained to me that Mr. Veilleux only gave him the invoices that
had been paid in full.
He also
explained that his system, the work method used by Distribution Vidéo Québec,
also involved pre-sales of movies and video games. This meant that, in the week
prior to placing its own orders, it had pre-sold things to its customers. And
those pre-sales were already entered in a computer system at the registrant's
place of business. This, um, allowed it to issue most of its invoices
directly from its computer system.
So he
explained to me that he kept a lot of statistics and that this computerized
data bank was quite complete. So then I asked him right away, at the beginning
of the audit, for a copy of that data bank. It would enable me to have a copy
of the invoices that had been produced by the computer system.
Q. If I understand
correctly, Mr. Maltais, these were pre-orders?
A. The pre-orders
that become … when they receive their own orders, they're filed with the
pre-order invoice, which becomes the sales invoice. They use the pre-order
invoice to … Well, all it does is that, when they physically issue it, it
becomes the actual sales invoice of the business.
Q. What happened
with that?
A. Two
or three days after I made my request, Mr. Boudreau told me that the
computer systems specialist had come to their premises and erased the data
bank because it took up too much space in their computer system. So at that
point … I, for my part, was pretty disappointed, because it would have allowed
me to more easily corroborate the registrant's true sales to see if the method
that Mr. Boudreau used to account for his invoices matched the actual
sales that passed through the registrant's computer system.
. . .
[13] In order to
illustrate the situation, I believe it is helpful to reproduce certain
excerpts:
[TRANSLATION]
Transcript,
June 13, 2006, at pages 28 and 29:
The list of the
registrant's duplicate invoices … with this particular issue, what I had to do,
in the course of my work, was to corroborate the invoices entered in the Excel
spreadsheet by Mr. Boudreau. And one of the parts had been entered
directly in the books, one invoice at a time.
Q. Let me stop you right there. If
I understand correctly, there were two accounting systems?
A. Yes. I believe that this was
due to the effects of the registrant's computer system crashing several times,
or to a change in its accounting method. However, at the beginning of the year,
he had begun entering one invoice at a time in his accounting system. Then, at
a certain point, he stopped doing that and used a spreadsheet to compile the
invoices on external sheets, so to speak, and took the sum of those invoices to
report the total of the invoices compiled in those accounting records.
. . .
[14] The auditor
explained that he devoted a few months of full‑time work to the audit;
before he resorted to an alternative method, he tried to proceed based on the
traditional approach, but he quickly realized that this would be totally
impossible.
[15] The auditor said
that he discovered 16 major errors, the vast majority of which involved a
wanton disregard for elementary accounting practices. In light of this, the
auditor concluded that, overall, the Appellant's accounting would not provide
reliable and probative results.
[16] With respect to the
many anomalies that he found, the auditor explained and described the work he
had done. Among other things, he said that he told Mr. Veilleux and his
accountant Jean‑Paul Boudreau about several irregularities involving
missing vouchers. The vouchers were supposed to be given to him in each of these
instances, but they never were.
[17] He also testified
that several hundred invoices were missing and that some invoices bore exactly
the same number; the Appellant's explanation for this was that invoice pads were
stolen.
[18] The Appellant's
evidence consisted primarily of the testimony of Jean‑Guy Veilleux
and his accountant Jean‑Paul Boudreau. Both men totally contradicted the
auditor and insisted that all the identified errors were corrected as soon as they
were noticed during the audit; they firmly maintained that all vouchers had
been made available to the auditor.
[19] Repeatedly, Mr.
Veilleux and Mr. Boudreau asserted unequivocally that all useful, relevant and
necessary documents, and all the appropriate information and explanations, were
always available, and added that everything was in keeping with standard
practices and was supported by all the documents needed to give a full
accounting for both GST and ITC purposes.
[20] The Appellant's director
blamed the print shop for the absence of invoices bearing hundreds of numbers,
and promised to obtain the print shop's written explanations, but he never did.
[21] Another time,
Mr. Veilleux, still attempting to explain the absence of documents
essential to a traditional auditing approach, spoke of a theft. Once again,
the auditor was not given a copy of the police report or a list of the stolen
property, even though he was supposed to receive the documents pursuant to
formal undertakings given by the Appellant or its representatives, a director
and an accountant.
[22] There was another
reference to an outright theft of invoice booklets by a customer who was left
alone for a brief moment at one of the establishments. The implication was
that such a misdeed made several theories possible.
[23] Upon being asked to
explain another anomaly, Mr. Veilleux stated that a former employee of the
Appellant's, who had left to start up his own business, probably used invoices
belonging to his former employer, the Appellant, in his new business.
[24] Mr. Veilleux
said that the Appellant made sales outside the country, and that the sales in
question were not subject to GST. When asked to provide credible supporting
documents in this regard, he simply said that he did not have them.
[25] The numerous
contradictions are not a matter of interpretation or perception, but are
brought out by even a cursory analysis of many exhibits and documents.
[26] Despite the evident shortage
and unreliability of supporting documents, and certain rather outlandish and questionable
explanations, Mr. Veilleux and his accountant once again submitted that
all supporting documents were available and that they answered all the
auditor's questions — assertions, obviously, that the auditor formally denied.
[27] Despite the
complexity of the activities carried on by the Appellant's business,
Mr. Veilleux, the only person in authority, never consulted a competent
person about the implementation of a system that would meet requirements.
[28] What is more, several
times he challenged the competence and expertise of the auditor with respect to
the type of business that he ran, thereby acknowledging its special nature. However,
despite the special nature of the business, he entrusted this heavy responsibility
to Jean‑Paul Boudreau, over whom he obviously held considerable
sway, and who, moreover, had neither the knowledge nor the experience to take
on such duties.
[29] In addition to all
the evidence that totally contradicted the contention that everything was available
and in order, there were a whole series of details that showed unequivocally that
the Appellant's accounting system was not as clear as Mr. Veilleux and Mr.
Boudreau claimed.
[30] I am referring,
among other things, to the numerous sales invoices that were used not for
sales, but rather to record goods placed on consignment. I am also referring to
the duplicate sales entries, to certain completely arbitrary reductions and to certain
sales-related numbers.
[31] Not only did the
evidence show that an alternative audit method was appropriate, but I am
entirely convinced that such an approach was the only possible one. Indeed, it
is not only the auditor's explanations concerning several irregularities, but
also the attitude and conduct of Mr. Veilleux and his accountant and the
numerous breaches of undertakings, that justify the decision to use an
alternative method.
[32] The method that was
selected consisted in collecting data from a sample that was likely to yield a
probative result. To ensure the quality of the process, the auditor first had
a statistical expert with the Department validate his work.
[33] One detail that is
truly astonishing is that Mr. Veilleux implicitly acknowledged the legitimacy
of such a method during meetings with the auditor. He even tried to convince
the auditor to rely primarily on the figures from his main customers, who, he
said, accounted for the largest share of his sales, but also the least
profitable because the profit margins for those large customers were close to
nil.
[34] The evidence showed
very persuasively, on a balance of probabilities, that the Appellant's
accounting system was deficient and totally unsatisfactory, thereby warranting
the use of an alternative method, which, in the instant case, consisted in
using a sample that would enable probative findings to be made.
[35] The Respondent and
the Appellant both relied on expert witnesses to support their respective
positions. The expert witnesses that they recognized were Claude Boivin
for the Appellant, and Bernard Collin for the Respondent.
[36] The Respondent
called Bernard Collin to testify in order to validate both the work that was
done and the assessment under appeal.
[37] As for the
Appellant, it retained the services of Claude Boivin as an expert.
Mr. Boivin essentially asserted that the reliability of a result obtained
from a sample is directly correlated to the quality of the sample, and that,
ideally, all the data should be used. The Court agrees entirely with these
assertions.
[38] Based on this axiom,
the Appellant's expert expressed certain reservations about the quality of the
auditor's work, arguing primarily that the sample that was used could and
should have been larger; the Court agrees with this as well, since anything
that provides greater reliability is obviously preferable.
[39] The issue in the
case at bar is as follows: must the auditor's work, which is clearly imperfect,
be rejected or disregarded? If the Court reaches this conclusion, it will have
to determine what the assessment should have been, based on the evidence
available.
[40] Claude Boivin
was called upon to justify the statistical method on which the assessment was
based. He explained that he performed various checks to verify the quality of
the samples that were selected. He concluded that the method used made it
possible to obtain a probative, and, most certainly, very reasonable result. He
acknowledged without hesitation that the larger the sample is, the more
probative the findings will be, and that the ideal situation is to use all the
data.
[41] As for the
Appellant's expert, his main assertion was that the he felt that the size of
the sample was too small — so small, in fact, that it affected the result. He was
not able to submit his own statistical study, as his purview was limited to a critical
appraisal of the Respondent's expert's work.
[42] He did not
persuasively show any specific failures or blatant errors. His testimony
essentially consisted in expressing reservations and concerns about the quality
of the data taken into consideration. He did not reject the approach;
essentially, he testified about the connection between the reliability of the
sample data and their quality and quantity.
[43] He asserted that the
quality and reliability of the conclusions drawn from a statistical approach
depend directly on the sample size, and the Court endorses this opinion without
reservation.
[44] In the case at bar,
the ideal approach was a possibility and could have been used, if only the
Appellant had implemented an adequate accounting system that was in keeping
with standard practices. If the Appellant had done so, the traditional and
direct audit method could have been used and the alternative method would have
been inappropriate and unjustified.
[45] Instead, the
Appellant chose to entrust the important matter of its accounting to a person
who clearly had neither the knowledge nor the skills required. Moreover, its
director himself acted in an uninterested manner — in fact, some would say with
great negligence — in the management of the Appellant's affairs, because he had
no genuine desire to keep an acceptable accounting. Perhaps he believed that
confusion and ambiguity would better serve the interests of the Appellant; what
is certain is that there was no true accounting system in place.
[46] As agents of the
state, all GST registrants must comply with the provisions of the Act in order
to properly carry out this task and ensure that an audit capable of producing
reliable findings can be conducted at any time.
[47] Good faith, excuses,
ignorance and incompetence can neither explain nor justify a total or even
partial absence of an appropriate accounting system that is in keeping with
standard practices.
[48] When a person must
register to collect taxes in the course of his activities, the person must
implement a true accounting system. Otherwise, he is liable to suffer what
could be very serious consequences, in terms of tax, interest and penalties.
[49] Indeed, unless there
is adequate accounting and all vouchers are available, an alternative audit
method will have to be used, and it is a foregone conclusion that such a method
cannot be as reliable as a direct audit method, which is made possible by an accounting
system that follows standard practices and the provisions of the Act.
[50] Following the use of
some alternative method, it is very easy for a registrant who is a party to a
tax dispute to point to errors, bring up various grievances and attack both the
quality of the alternative method and the auditing work thereby performed. It
is also easy to claim that the alternative method selected was imperfect and
unreliable.
[51] However, the
registrant's chances of success will be very slim, especially if the work was
done in good faith, judiciously and within reasonable parameters.
[52] Thus, unless the registrant
can show that the approach used was abusive and vindictive, that it was not
serious, and that it was tainted by arbitrariness and unacceptable work
methods, the registrant will have to live with the financial consequences,
however painful they may be.
[53] In the case at bar, the
Respondent began by justifying the use of an alternative method. She also
listed the numerous facts that led her to resort to such a method.
[54] Admittedly, some of
these elements were less determinative than others. The question whether it is
legitimate to resort to an alternative accounting method has nothing to do with
the number of errors found; it is essentially tied to the seriousness of those
errors or of the lack of information and documentation.
[55] Thus, a registrant
who has no supporting documents in his possession certainly cannot claim that
the use of an alternative method is inappropriate; this error alone would be
amply sufficient to justify resorting to an alternative method.
[56] In the case at bar,
I find that the fact that the auditor noted several significant and
determinative flaws amply justifies the use of an alternative method.
[57] A taxpayer who has
been assessed by means of an alternative method and wishes to contest the
merits of the assessment must preferably prove that the use of such a method
was inappropriate under the circumstances because the available vouchers were
sufficient to permit an assessment to be made using a traditional and direct
method.
[58] In fact, during the
hearing, I told the Appellant's representative that I found it quite strange
that he had expended no effort or money on preparing a case for what the
assessment should have been, especially since this was a simple, realistic and
extremely reliable exercise given that he and the accountant insistently
asserted that everything was in order and that all supporting documents were
available.
[59] In other words, if
all the vouchers and records were available, why was no adequate evidence
prepared to show what the assessment should have been? Not only was no such
evidence adduced, but all the Appellant's efforts consisted essentially in
criticizing the audit work.
[60] In tax cases,
explanations that are essentially oral and are aimed at discrediting the
auditors' work have little or no chance of being accepted, barring the most
exceptional circumstances.
[61] It is not that bad
faith is to be presumed; rather, essentially, it must be understood that in a
system based on self-assessment, it is entirely normal and legitimate to expect
that the person who is acting as an agent for the State be able, at any time,
to provide an accounting based on certain elementary rules that permit a
reliable result to be achieved.
[62] I do not accept the allegation
that all the documents were available and complete and that a reliable result
could be achieved with them; that explanation was outlandish, totally implausible,
and wholly inconsistent with the evidence adduced. The mere fact that a
very large number of invoices were missing and that some invoices bore the same
number totally refutes this allegation made by the Appellant's director and
accountant.
[63] Accepting the
essentially oral and completely implausible explanations (theft, loss, error by
the print shop, computer problem, complexity of operations, etc.) would have
the effect of approving aberrations that are totally irreconcilable not only
with the provisions of the Act, but also with basic common sense.
[64] In fact, if all the
documents and vouchers were available and the accounting was adequate, why were
they not submitted to a competent accountant so that he could produce an expert
report consistent with the Appellant's arguments? Why did the Appellant
not submit a result drawn from a valid sample by its own expert?
[65] The Appellant
preferred to give the Court the report of an expert who asserts that the
reliability of the auditor's findings was doubtful given the quantity of data
taken into consideration.
[66] Is this sufficient
to discredit the work that the Respondent did to justify the assessment? I find
that it is not, and there is added support for my conclusion in the fact that
the Appellant's evidence on the subject does not permit one to conclude that
the approach was unreasonable and that the auditing and analysis work that was
done was of poor quality.
[67] I did not understand
why there was no direct evidence of what Mr. Veilleux and Mr. Boudreau said was
complete in terms of both quality and quantity; in fact, I said so at the
hearing.
[68] It would have been
easy, and above all more reliable, to submit direct evidence substantiated by
various witnesses. Why was no such evidence adduced? The Court has but one
explanation: under the circumstances, such evidence was impossible to adduce given
the absence of documents and the numerous administrative inconsistencies.
[69] The burden of proof
was on the Appellant. This does not release the Respondent from the duty to
make a case of good quality using methods that generate reasonable and
plausible results or findings.
[70] The fact that the
Appellant managed to show certain lacunae and even a significant omission — a
fact that the Respondent actually acknowledged from the outset — does
not have the effect of discrediting the auditor's work. If it did, this would
be quite surprising, since alternative methods are, by their very nature, less
reliable and more vulnerable, and produce more questionable results.
[71] The Appellant did
not meet its statutory obligations under section 286 of the Act, which
reads:
(1) Every
person who carries on a business or is engaged in a commercial activity in
Canada, every person who is required under this Part to file a return and every
person who makes an application for a rebate or refund shall keep records in
English or in French in Canada, or at such other place and on such terms and
conditions as the Minister may specify in writing, in such form and containing
such information as will enable the determination of the person’s liabilities
and obligations under this Part or the amount of any rebate or refund to which
the person is entitled.
(2) Where
a person fails to keep adequate records for the purposes of this Part, the
Minister may require the person to keep such records as the Minister may
specify and the person shall thereafter keep the records so specified.
(3) Every
person required under this section to keep records shall retain them until the
expiration of six years after the end of the year to which they relate or for
such other period as may be prescribed.
(3.1) Every
person required by this section to keep records who does so electronically
shall retain them in an electronically readable format for the retention period
set out in subsection (3).
(3.2) The
Minister may, on such terms and conditions as are acceptable to the Minister,
exempt a person or a class of persons from the requirement in subsection (3.1).
(4) Where
a person who is required under this section to keep records serves a notice of
objection or is a party to an appeal or reference under this Part, the person
shall retain, until the objection, appeal or reference and any appeal therefrom
is finally disposed of, every record that pertains to the subject-matter of the
objection, appeal or reference.
(5) Where
the Minister is of the opinion that it is necessary for the administration of
this Part, the Minister may, by a demand served personally or by registered or
certified mail, require any person required under this section to keep records
to retain those records for such period as is specified in the demand.
(6) A
person who is required under this section to keep records may dispose of the
records before the expiration of the period in respect of which the records are
required to be kept if written permission for their disposal is given by the
Minister.
[72] Since the Appellant
adduced no direct evidence and was essentially content to criticize and make
certain complaints about the work that was done, the Court can obviously not
conclude that the Appellant met its burden of proof.
[73] However, the quality
of the evidence that the Respondent submitted was adversely affected by the
poor quality of the available data. Considering the numerous constraints that
this file involved, the evidence has shown that the colossal work was done in
an amply acceptable manner and that the conclusion on which the assessments
were based was reasonable; thus, the Court has no reason to discard them.
[74] As for the ITCs,
analysis of the invoices showed that the vouchers (purchase invoices) did not meet
the requirements of the Act, notably because several purchase invoices were
issued to third parties.
[75] The definition of
the term "recipient" in subsection 123(1) of the Act reads as
follows:
"recipient"
of a supply of property or a service means
(a) where
consideration for the supply is payable under an agreement for the supply, the
person who is liable under the agreement to pay that consideration,
(b) where paragraph (a) does not
apply and consideration is payable for the supply, the person who is liable to
pay that consideration, and
(c) where no consideration is
payable for the supply,
(i) in the case of a supply of property
by way of sale, the person to whom the property is delivered or made available,
(ii) in the case of a supply of property
otherwise than by way of sale, the person to whom possession or use of the
property is given or made available, and
(iii) in the case of a supply of a
service, the person to whom the service is rendered,
and any reference to a person to whom a
supply is made shall be read as a reference to the recipient of the supply;
[76] The Appellant did
not meet this definition and was not entitled to the ITCs for the invoices in
respect of which it did not come within the Act's definition of the term
"recipient".
[77] The Respondent
refused to allow certain ITCs on the ground that the invoices were not adequate
because they did not meet the requirements provided for in the Act. Those
requirements are contained in section 169 of the Act, which reads:
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.
(1.1) Where a person acquires
or imports property or a service or brings it into a participating province
partly for use in improving capital property of the person and partly for
another purpose, for the purpose of determining an input tax credit of the
person in respect of the property or service
(a) notwithstanding section
138, that part of the property or service that is for use in improving the
capital property and the remaining part of the property or service are each
deemed to be a separate property or service that does not form part of the
other;
(b) the tax payable in respect
of the supply, importation or bringing in, as the case may be, of that part of
the property or service that is for use in improving the capital property is
deemed to be equal to the amount determined by the formula
A × B
where
A is
the tax payable (in this section referred to as the “total tax payable”) by the
person in respect of the supply, importation or bringing in, as the case may
be, of the property or service, determined without reference to this section,
and
B is the extent (expressed as
a percentage) to which the total consideration paid or payable by the person
for the supply in Canada of the property or service or the value of the
imported goods or the property brought in is or would be, if the person were a
taxpayer under the Income Tax Act, included in determining the adjusted cost
base to the person of the capital property for the purposes of that Act; and
(c) the tax payable in respect
of that part of the property or service that is not for use in improving the
capital property is deemed to be equal to the difference between the total tax
payable and the amount determined under paragraph (b).
(2) Subject to this Part,
where a registrant imports goods of a non-resident person who is not registered
under Subdivision d of Division V for the purpose of making a taxable supply to
the non-resident person of a commercial service in respect of the goods and,
during a reporting period of the registrant, tax in respect of the importation
becomes payable by the registrant or is paid by the registrant without having
become payable, the input tax credit of the registrant in respect of the goods
for the reporting period is an amount equal to that tax.
(3) No amount shall be
included in determining an input tax credit of a person in respect of tax that
becomes payable by the person under subsection 165(2) or section 212.1 while
the person is a selected listed financial institution unless
(a) the input tax credit
is in respect of
(i) tax that the person is
deemed to have paid under subsection 171(1), 171.1(2), 206(2) or (3) or 208(2)
or (3), or
(ii) an amount of tax that is
prescribed for the purposes of paragraph (a) of the description of F in
subsection 225.2(2); or
(b) the person is permitted to
claim the input tax credit under subsection 193(1) or (2).
(4) A registrant may not
claim an input tax credit for a reporting period unless, before filing the
return in which the credit is claimed,
(a) the registrant has obtained
sufficient evidence in such form containing such information as will enable the
amount of the input tax credit to be determined, including any such information
as may be prescribed; and
(b) where the credit is in
respect of property or a service supplied to the registrant in circumstances in
which the registrant is required to report the tax payable in respect of the
supply in a return filed with the Minister under this Part, the registrant has
so reported the tax in a return filed under this Part.
(5) Where the
Minister is satisfied that there are or will be sufficient records available to
establish the particulars of any supply or importation or of any supply or
importation of a specified class and the tax in respect of the supply or
importation paid or payable under this Part, the Minister may
(a) exempt a specified
registrant, a specified class of registrants or registrants generally from any
of the requirements of subsection (4) in respect of that supply or importation
or a supply or importation of that class; and
(b) specify terms and
conditions of the exemption.
[78] The auditor admitted
that a mistake was made, notably in the purchases listed in the table entitled
[TRANSLATION] "Correction to Tupper Purchases (1999)" (Exhibit I‑3),
where the file for the 1999 taxation year was not accepted.
Since the admission had the effect of reducing the assessment that
gave rise to this appeal, the appeal should be allowed in order to permit the
relevant corrections to be made.
[79] Since the assessment
under appeal will have to be amended, I must allow the appeal, even though the
requisite correction will have a marginal effect on the assessment.
[80] There shall be no costs.
Signed at Ottawa, Canada, this 10th day of July 2007.
"Alain Tardif"
Translation
certified true
on this 17th day
of August 2007.
Brian McCordick,
Translator
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