Citation: 2008 TCC467
Date: 20080922
Docket: 2006-181(GST)G
BETWEEN:
LABRANCHE, MONTPETIT,
ST-JEAN INVESTISSEMENTS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
AMENDED REASONS FOR JUDGMENT
(Delivered
orally from the bench on June 13, 2008
at Montréal,
Quebec and modified for
clarity and precision,
but with no significant
amendments.)
Archambault J.
[1]
Labranche,
Montpetit, St-Jean Investissements Inc. (LMS), is appealing from an assessment made by the
Ministère du Revenu du Québec (the MRQ) as an agent of the Minister of
National Revenue (the Minister) regarding the period of May 1, 1999 to
April 30, 2003 (relevant period) under the Excise Tax Act (the Act).
[2]
The issue is in regard
to the application of the goods and services tax (GST) on understated sales. In
the Reply to the Notice of Appeal, the amount in question following the
assessment resulting from the objection is $86,287. (See also, Exhibit A-1).
This amount represents $85,727 in total GST collected and collectable but not
remitted, and $559.50 in non-allowed input tax credits (ITC).
[3]
After the lodging of
the appeal, the parties came to an agreement on other modifications. Certain
errors, from the Minister's calculations in the application of the indirect
method for determining understated sales, were corrected. This method was
selected because LMS had used a blanking module for sales when operating its
restaurant. This method involved calculating a coefficient to determine what
the sales would have been based on the taxpayer's purchases. Therefore, for
each litre of drinks purchased (essentially wine and beer, including draft
beer), total sales were determined to be $30.76. These amounts were very
similar from one period to another and can be found in Exhibit I-1, an
agreement of facts, in which the coefficients for the relevant period are
specified.
[4]
Following a pre-hearing
conference (the contents of which were not revealed to me), in the agreement of
facts, the parties agreed that the only remaining issue was the amount of the
loss relevant for the purposes of calculating the understated sales. By
estimating these sales using wine and beer purchases, the amount of the loss of
these drinks, inevitable when operating a restaurant, had to be considered. The
controversy before the Court bore on this issue. Following the corrections made
by the Minister, the amount in question went from $86,287 to $62,472.75, which
is the total of the $62,458 in GST collected or collectable for the understated
sales, and the $14.26 in ITC.
[5]
At the very start of
the hearing, counsel for the Respondent announced that, in addition to the
prior concessions made, he was ready to reduce the GST collected or collectable
from $62,458 to a round number, $50,000, to take into consideration that the
losses calculated by the Minister, around 2% of beverages sold (various brands
of beer and wine), may not have been sufficient and that all
"liquids" should be considered. According to my calculations, this
$50,000 would allow for higher losses, on average 5.11% for the relevant
period. This figure was calculated using the total litres purchased, 156,405, multiplied by
the sales coefficient of 30.76 (calculated by the Respondent), giving estimated
sales before losses of $4,811,018. From this amount, I subtracted the sales of
$3,850,887, claimed by LMS. The difference before losses was $960,162.
Additional sales according to the Respondent were $714,286 (50,000/.07),
leaving a difference of $245,876
granted by the Respondent as losses, corresponding to 5.11%
($245,876\4, 811, 018).
[6]
To establish the amount
of its losses, LMS offered in evidence the fact that it faced problems during
the relevant period, mainly in regard to the refrigeration of draft beer. There
were also high losses from the pouring and handling of the draft beer. This
situation could warrant the higher than normal losses, estimated at 15.32%
(736,941\4,811,018) representing the average figure for the relevant period.
This figure was determined by the use of the estimated actual sales,
$4,811,018, from which declared sales of $4,074,077 were subtracted,
giving a difference before losses of $736,941. For the Appellant, this
difference was the amount of their losses.
[7]
At the hearing, one of the
crucial elements, in my opinion, for establishing the amount of LMS's loss was
to first determine its actual sales. To do so, Mr. St-Jean, one of LMS's
shareholders, testified to submit his calculation papers to justify the amount
of the LMS's actual sales.
[8]
Counsel for the
Respondent objected to the testimony and submission of the table because the
Court was not presented with the best evidence. I allowed the witness to
continue testifying on his word that he had consulted his own records to
establish the figures discussed during his testimony, the admissibility of
which counsel for the Respondent argued against, particularly that the best
evidence was not being presented.
[9]
In my opinion, Mr.
St-Jean's evidence regarding the actual sales is insufficient because the best
possible evidence was not presented, namely the records themselves or
spreadsheets created at the time to account for sales being erased by the
blanking module commonly called a "zapper." It can be concluded that
(i) the evidence is inadmissible, or (ii) if admissible, its evidentiary weight
is insufficient. In my reasons, I incorporate the majority of counsel for the
Respondent's arguments regarding the issue of the inadequacy of the evidence
submitted. First, the best evidence was not presented. Moreover, there were
contradictions in the testimony, particularly regarding the dates the
"zapper" was introduced. When we rely on our memory because there is
no sufficient corroborating evidence, it is easy to make mistakes, either in
good or bad faith. This is why it is unwise to appear in court without the best
evidence. These two arguments, in my opinion, justify my finding that the
amount of the losses during the relevant period was not successfully or
precisely quantified.
[10]
I will restate my
comments to counsel for LMS during the submissions, namely that I find this
situation very ironic. The fundamental issue raised by this assessment was the
amount of the actual sales, including those that were understated when GST
claims were filed because of the erasing by the "zapper." That was
the issue. However, to establish the amount of the loss required to complete
the MRQ's calculation method, we were informed during the hearing that a
contemporaneous, parallel accounting method was used that allowed Mr. St-Jean
to set the actual amount of all sales during his testimony. It seems to me that
this evidence could have been submitted, and would have established the actual
amounts of the sales.
[11]
I will recall the
comments of Bowman J. in Ramey v. The Queen, which I cited in André
Léger, [2001] DTC 471, at page 474, where he wrote that the only truly
effective method of challenging an assessment by net worth is to proceed with a
complete reconstruction of the taxpayer's income. It seems to me that this would
have been the appropriate way to establish the actual amount.
[12]
I also share counsel
for the Respondent's point of view on the inadequacy of the company's
accounting records. When financial statements do not adequately reflect total
sales, the taxpayer is open to an audit, which can lead the MRQ to use less
precise methods for establishing the understated sales amounts. The Minister
was justified here, considering the evidence submitted before me, in using an
indirect method.
[13]
I agree with the
approach followed by Tardif J. in Bastille v. Her Majesty the Queen,
99 DTC 431, also cited in Léger at paragraph 14. The burden of
proof is on the taxpayer and it is not sufficient to challenge certain aspects
of an assessment established using a subsidiary method to challenge an
assessment. I am in complete disagreement with the argument of counsel for LMS,
according to which there was a partial reversal of the burden of proof because
of the presumption of the validity of the assessments. According to counsel, the
fact that a number of significant errors appeared in the auditor's calculations
results in a reversal of the burden of proof. The reality is that once the
Minister was informed of these errors, they were granted. It was not necessary
to come to court to defend the undefendable, to use what I think is an
expression counsel for the Respondent often uses before the Court.
[14]
The rationale for the
rule by which the burden of proof is on the appellant must be recalled. First,
as Hugessen J. stated in a case whose style of cause I now forget, any
applicant who appears before any court must establish the facts that justify
the findings being sought. The second reason is that the appellant is best
suited to offer evidence because he has knowledge of the relevant facts. In my
opinion, challenging an assessment by arguing an alleged reversal of onus is an
unwarranted procedural tactic. I do not know of any decision in which this
approach was followed. In my opinion, this argument must be dismissed.
[15]
When LMS appeared
before me yesterday and today, it was to provide evidence of the 23% loss it
alleged at paragraph 21 of its Notice of Appeal. LMS attempted to establish the
loss by subtracting the declared sales from the amount of actual income it
claims it earned during the relevant period; the difference was, according to
the Appellant, its losses. The percentage, as mentioned above, was 15.32% (and
not 23%).
[16]
For the reasons I
already mentioned, the taxpayer has failed to do so. However, the evidence
showed that there were circumstances that justified a loss higher than the one
the Minister granted when establishing the assessment, of 2%. It was probably
fair, as I suggested to counsel for LMS, that the Respondent agreed, at the
very start of the hearing, to grant an amount higher than 2% that had not been
granted for certain products sold. First, the calculation was to take into
consideration all "liquid" products. Moreover, a higher percentage
was to be granted, which I quantified at around 5.11%.
[17]
I understand the significant
and financial difficulties faced by the shareholders of LMS to operate LMS.
They first tried to distribute the repayment of certain debts, in particular,
tax debts, as many company administrators do in similar circumstances. However,
when those companies declare bankruptcy, it is to their detriment because the
administrators can be held responsible for some of the tax debts. Here,
unfortunately, LMS overstepped the limit of what is acceptable by choosing to
deliberately understate its sales. For this, there was a price to pay. The
deletion of accounting records may make a taxpayer vulnerable during an audit.
This is what happened here. As long as there is no evidence to the contrary,
and despite the arguments that sales could have been reconstructed with the
"zapper," I do not believe the evidence is clear enough on the actual
sales figures and the testimonial evidence is also not sufficient to establish
the actual figure of the income earned. I accept counsel for the Respondent's
arguments on the issue of witness credibility, the contradictions already
mentioned, namely about the date the data eraser module was set up.
[18]
LMS challenged the
Minister's calculations when he applied the indirect method. They succeeded in
having some modifications made, which were satisfactory except for the amount
of loss. This is the amount to be determined. What is a reasonable amount that
should be determined?
[19]
From
LMS's witness testimony, I am persuaded that there was a serious issue with the
handling of the draft beer during the relevant period. It seems reasonable to
me to split the difference and conclude that the losses were halfway in between
the 15% requested by LMS and the 5% the Respondent granted from the beginning,
for 10%. Clearly, when I noticed the appeals officer made a similar offer, this
reassured me in my decision.
[20]
The appeal from the
assessment established under the Act, notice number 3020139, dated
November 30, 2005, is allowed, and the assessment is referred back to the
Minister of National Revenue for review and reassessment to allow for the
admissions in the agreed statement of facts, submitted as Exhibit I‑1,
and in the calculation of the understated sales according to the Respondent's
indirect method, to take into consideration that the Appellant has the right to
losses equal to 10% of the total beer and wine purchases (before losses) in
litres, in the following amounts:
|
40,869.55 litres
|
for 2000
|
|
42,134.00 litres
|
for 2001
|
|
38,513.00 litres
|
for 2002
|
|
35,434.30 litres
|
for 2003
|
[21]
The issue of costs will
be handled during another hearing to be set at a later date.
Signed at Montréal, Quebec, this
22nd day of September 2008.
"Pierre Archambault"
on
this 18th day of November 2010.
François
Brunet, Revisor
CITATION: 2008 TCC 467
COURT FILE No.: 2006-181(GST)G
STYLE OF CAUSE: LABRANCHE, MONTPETIT, ST-JEAN INVESTISSEMENT INC. AND THE QUEEN
PLACE OF HEARING: Montréal, Quebec
DATE OF HEARING: June 13, 2008
REASONS FOR
JUDGMENT BY: The Honourable Justice Pierre Archambault
DATE OF JUDGMENT: July 7, 2008
REASONS FOR
JUDGMENT: August 27, 2008
APPEARANCES:
|
Counsel for the Appellant:
|
Christopher Mostovac
|
|
Counsel for the Respondent:
|
Benoit Denis
|
COUNSEL OF RECORD:
For the Appellant:
Name: Christopher Mostovac
Firm: Starnino Mostovac
Montréal, Quebec
For the
Respondent: John H. Sims,
Q.C.
Deputy
Attorney General of Canada
Ottawa, Canada
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