Citation: 2008 TCC 663
Date: 20081203
Docket: 2007-606(GST)G
BETWEEN:
MAXI-MAG INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Lamarre J.
[1]
Maxi-Mag Inc. is
appealing from assessments made by the Minister of Revenue of Québec ("the Minister")
under the Excise Tax Act ("the ETA") for the periods from
February 1, 2003, to January 31, 2005, February 1, 2005, to
April 30, 2005, and August 1, 2005, to October 31, 2005.
Upon making these assessments, the Minister claimed tax from the Appellant in
the amounts of $47,188.29 and $1,461.62, including interest and penalties, in
connection with unreported cigarette sales for the periods in issue. The
Appellant was authorized to sell discount-brand cigarettes (Suprême, Baileys,
Tabec, Pulsar, Trad-A and La Percée) to retailers, and held a
"collection officer" permit under the Tobacco Tax Act since
February 2000. The Appellant is contesting the assessments on the grounds that
it reported all its tobacco sales, and that the Minister is attributing the additional
sales to it in error.
[2]
The Appellant was
incorporated by Patrick Lavallée. His father, Yves Lavallée, operates the
business. He is responsible for the Appellant's tobacco purchases and
deliveries. Yves Lavallée is also a tobacco vendor, and he personally applied
for, and was denied, a tobacco distribution permit. His son agreed to help him
by applying for a permit on the Appellant's behalf.
[3]
Jean-Guy Brûlé, a tax
auditor for Revenu-Québec, conducted the audit that led to the assessments
under appeal. He began by visiting the location where the Appellant stored its
tobacco inventory: a place made available to it free of charge by Marcel Guérin,
the president of Entrepôt A-1 Inc., which warehoused goods from foreign
countries pending customs clearance. Mr. Guérin is a friend of Yves Lavallée.
He explained that he let Mr. Lavallée store his cases of cigarettes in his
warehouse as he saw fit, and did not get involved.
[4]
When Mr. Brûlé showed
up unannounced at the warehouse on November 23, 2004, neither
Mr. Guérin nor Mr. Lavallée was there. Only two employees of Mr. Guérin's
were on the premises, and they showed only two cases of cigarettes that had
been left at the warehouse. On the same day, Mr. Brûlé phoned Mr. Guérin to
verify the accuracy of the inventory that the Appellant had left at its
warehouse that day. Mr. Guérin confirmed that there were only two cases there.
In court, Mr. Guérin testified that he had always assumed that Mr.
Lavallée left all the inventory in the same place. He said that if there were
cases elsewhere in the warehouse that day, it might have been the first time
that this ever happened. In a telephone conversation that same day, Mr. Lavallée
told Mr. Brûlé that he transported inventory in his truck as well. Mr. Brûlé
then asked him to provide load manifests setting out the quantities purchased
upon each load of tobacco being placed in the truck. It appears that Mr. Lavallée
replied that he did not retain these manifests, whereupon Mr. Brûlé asked him
to retain all future manifests and send them to him. After this, Mr. Lavallée
apparently sent Mr. Brûlé seven manifests between November 25, 2004,
and December 2, 2004. The manifests (Exhibit I‑11) are numbered 1 through
7. However, they record sales by the Appellant, not purchases. Mr. Brûlé
explained that it is the purchases that need to be recorded on the manifests,
in order to show that the tobacco was purchased legally from authorized
collection officers. The manifests can then be used to verify inventory. Mr.
Brûlé also found it very surprising that the numbering of these manifests began
with the number 1, since Mr. Lavallée told him that he had always
filled out manifests in the past, but that he did not keep them.
[5]
Mr. Brûlé returned to
the warehouse unannounced on November 30, 2004. This time, Mr.
Guérin was there, and had more cases of tobacco than the previous time: roughly
30 (Exhibit A-1).
[6]
Mr. Brûlé then tried to
reconcile the inventories on the basis of what the Appellant reported on
December 5, 2003 (the date when the tobacco tax increased, which
required authorized tobacco vendors to state what their inventories were on
that date). To that inventory of December 5, 2003, Mr. Brûlé added
the Appellant's cigarette purchases from December 5, 2003, to
November 23, 2004, the date of his first surprise visit to the warehouse.
He then subtracted from that total the reported cigarette sales for the
same period. The purchases and sales were determined on the basis of the
business's purchase and sales journal. Upon doing this reconciliation,
Mr. Brûlé noticed that a large quantity of tobacco should have been at the
warehouse, in view of the unsold quantity of tobacco. However, at the time of his
surprise visit of November 23, 2004, there were only two cases of tobacco, that
is to say, 100 cartons of 200 cigarettes. In view of the reconstructed
inventory, there should have been 1,726 cases (the figure arrived at by adding
up the reconstructed inventory for each brand of tobacco that the Appellant was
authorized to sell) (Exhibit I‑8).
[7]
In addition, Mr. Brûlé
says that, from November 23 to November 30, 2004, no purchases were
entered in the Appellant's books. For the period from November 25 to
December 2, 2004, on the basis of the manifests that Mr. Lavallée
sent to Mr. Brûlé upon request, the stock contained in the truck could not
have been the entire missing inventory. Indeed, on cross-examination, Mr.
Lavallée acknowledged that his truck could hold no more than fifteen 50-carton
cases, or a total of 750 cartons. Moreover, he had no insurance coverage
for cigarette transportation, and he acknowledged that he kept a minimal amount
of cases in his truck, and that he delivered them the same day. Yet, according
to Mr. Brûlé, from November 18 to November 25, 2004, the sales
journal reported no sales, a fact that caused him to doubt whether Mr. Lavallée
was storing cases in his truck during that period.
[8]
Moreover, an inspection
report under the Tobacco Tax Act had already been made with respect to Mr. Lavallée.
The report charged him with transporting tobacco products that he was not
authorized to sell, and for which he had no load manifests showing where the
products had been purchased. His case was handled by Special Investigations,
and he pleaded guilty to offences committed in 2000 and 2003 in contravention
of the Tobacco Tax Act, for which he paid fines of up to $8,000.
[9]
Lastly, the Appellant's perpetual inventory (Exhibit I‑10)
showed negative inventory levels as early as 2001, suggesting that certain
purchases were not entered in the accounting books. In his laconic testimony, Mr.
Gmora, the Appellant's
accountant, tried to explain this by saying that the purchases were entered
after the sales.
[10]
Having obtained all
this information, Mr. Brûlé inferred that there were unreported tobacco sales,
and prepared a first draft assessment quantifying unremitted Goods and Services
Tax (GST) on unreported sales (Exhibit I‑8).
[11]
Following the submission
of this first draft assessment based on inventory reconciliation, Mr. Brûlé and
his team leader Denis Perron met with Mr. Lavallée and his accountant in
May 2005. At the meeting, Mr. Lavallée stated that, on November 23, 2004,
there were seven to nine other cases at the back of the warehouse that Mr. Guérin
had not seen. Mr. Lavallée apparently also told Mr. Brûlé that,
commencing November 25, 2004, all his inventory was kept near the
warehouse entrance door. Mr. Lavallée also stressed the fact that this draft
assessment did not take account of the inventory in the truck, and that,
because of this, the draft assessment contained mistakes (see Exhibit I‑9,
the audit report, at page 1.5). Following this meeting, Mr. Brûlé and
Mr. Perron decided to reconsider the file on a completely different basis.
They asked Mr. Lavallée to produce [TRANSLATION] "all the handwritten invoices issued [to customers] [as well as] the unused invoices, in order to establish the
numerical sequence of those invoices." (See Exhibit I‑2,
the demand letter of June 21, 2005.)
[12]
Indeed, in his
testimony, Mr. Lavallée explained that he would issue his customers a first
invoice on which he wrote, by hand, the quantity of tobacco purchased by the customer
as well as the purchase price including GST. Mr. Lavallée was paid
immediately upon the issuance of the handwritten invoice. That evening, or
the next day, Mr. Lavallée entered the contents of the handwritten invoice on a computer,
and sent the electronic invoice to the customers (for an example, see
Exhibit A‑4). In the course of the audit, Mr. Lavallée provided Mr. Brûlé
with all the electronically-prepared invoices in his possession, with the
corresponding handwritten invoices attached (one such invoice per year was
tendered in evidence as an example, and these invoices are contained in
Exhibit I‑1).
[13]
Mr. Brûlé realized that
the electronic invoices followed a numeric sequence, but that, strangely, the
corresponding handwritten invoices did not. Indeed, he noticed that there were
roughly a dozen handwritten invoices bearing the number 1, the number 2,
or the number 41, for example. Mr. Lavallée explained that he used several
small invoice booklets when he made his sales, and that he did not pay attention
to the numerical sequence.
[14]
However, Mr. Brûlé noticed
that there were far too many discrepancies between the sequential numbers of
the handwritten invoices that were attached to the electronic invoices.
He also noticed that the handwritten invoices never bore a number above 50. He therefore
drew the inference that Mr. Lavallée used booklets of 50 handwritten
invoices, and determined that Mr. Lavallée must have used an average
of twelve 50‑invoice booklets (since certain handwritten invoice
numbers were repeated a dozen times).
[15]
Subsequently, Mr. Brûlé
determined an average number of cartons per invoice based on the
electronically-prepared invoices that he was given. His next step, based on
that average, was to calculate the total number of cartons sold, on the
assumption that the Appellant must have issued at least 600 invoices (50
invoices x 12 booklets) between April 1, 2003, and
December 5, 2003, and between December 6, 2003, and
January 13, 2005 (Exhibit I‑9, pages 3.15 and 3.83)
From this total, Mr. Brûlé deducted the sales of cartons purchased from
authorized collection officers (the Appellant is authorized to purchase
tobacco only from such officers). He concluded that the difference represented
cartons unlawfully purchased from sources other than collection officers. Indeed,
as stated above, Mr. Lavallée had already been arrested and convicted, in 2000
and 2003, on charges of possession of tobacco cartons that he was not entitled
to resell, contrary to the Tobacco Tax Act. Indeed, that is why his son
is the Appellant's owner. Yves Lavallée refused to pay the $100,000 bond that
he was asked to pay in order to obtain his permit in view of his past offences
under the legislation.
[16]
Mr. Brûlé thus determined
an average selling price for these unlawfully purchased tobacco cartons, and
calculated the GST on these unreported sales, leading to the assessments
currently under appeal.
The parties' arguments
[17]
Counsel for the
Appellant submits that the additional sales attributed to him are based on
suspicions and are completely unrealistic. He tendered, as Exhibit A‑3,
a letter from the consumption tax audit unit of the Ministère du Revenu du
Québec, dated April 5, 2002, further to an audit pertaining to the
period from November 1, 1999, to July 31, 2001, in which
the Appellant was asked to make corrections to his invoicing in order to comply
with the requirements of the Tobacco Tax Act, and to state the
sales tax on the selling price separately on all invoices.
[18]
In a previous letter,
dated March 22, 2002, the Minister made no adjustment to the GST
returns, Québec Sales Tax (QST) returns and tobacco tax returns filed by the
Appellant for the same period (Exhibit A‑3).
[19]
Mr. Lavallée explained
that he always uses the same billing method. He issues a handwritten
invoice for the tobacco sold, and re-enters the sale on an electronic invoice
that he sends to the customers. He argues that the fact that the handwritten
invoices are not in numerical sequence is immaterial. Indeed, according to
his explanations, he had several booklets of handwritten invoices with him, and
he did not pay attention to the invoices that he used when he made sales to
customers.
[20]
Moreover, counsel for
the Appellant insists that the inventory taken by Mr. Brûlé on November
23, 2004, cannot have reflected reality. Indeed, as early as
November 30, 2004, Mr. Brûlé noticed that there were roughly 30
cases at the warehouse. If there were no purchases between November 23 and
November 30, 2004, there could not possibly have been just two cases
upon Mr. Brûlé's first visit on November 23. In his submission, the
attribution, by the Minister, of all these unreported sales to the Appellant in
unwarranted because these sales are based only on estimates, not on actual
evidence that tobacco was purchased from people who did not have a collection
officer's permit.
[21]
For her part, counsel
for the Respondent argues that the assessments are based on several facts.
First of all, she finds it surprising that doubt is being cast on the statement
made by Mr. Guérin, the warehouse owner, to the effect that there were only two
cases in the warehouse on November 23, 2004. She submits that, on the
basis of his testimony, there is no ground to believe that there could have
been any cases elsewhere. As for the goods that were supposedly in Mr. Lavallée's
truck, she noted that he was unable to provide any manifests showing that the
inventory was in the truck on November 23, 2004.
[22]
Moreover, no purchases
were entered in the Appellant's books from November 23 to November 30, 2004.
Hence, Counsel for the Respondent infers that the difference in the physical
inventories at the warehouse between November 23 and
November 30, 2004, may constitute purchases from sources other than
authorized collection officers. Mr. Lavallée has admitted to possessing
tobacco that he was not authorized to resell. He has pleaded guilty to offences
under the Tobacco Tax Act. She submits that, given these
facts, it is natural to have doubts about the totality of the tobacco sales
reported by the Appellant.
[23]
Counsel for the
Respondent notes that the Minister, after noticing inventory shortfalls,
adopted a completely new approach before issuing assessments. Now, he noticed a
flagrant shortage of invoices prepared by hand. There appear to have been
364 electronic invoices (based on the audit report, Exhibit I‑9,
at pages 3.14 and 3.22), to which handwritten invoices completely out
of numerical sequence were attached. Mr. Brûlé estimated that there were
roughly 600 handwritten invoices. The difference is substantial. Counsel
for the Respondent submits that Mr. Lavallée has only himself to
blame. If he had not been caught in possession of tobacco that he acquired from
people who do not have a collection officer's permit, if there had not been
problems reconciling the Appellant's inventories, and if he had kept the load
manifests proving the quantities of tobacco purchased, the outcome of the
audit would undoubtedly have been different. In her submission, the Appellant
has not rebutted the presumption that the assessments are valid, and they
should be confirmed.
Analysis
[24]
Counsel for the
Appellant cited one of my decisions, rendered in a completely different
context, to argue that the onus is on the Respondent to show, on a balance
of probabilities, that the assessments are well-founded. In Lavie v. The Queen,
[2006] T.C.J. No. 521 (QL), I held that the respondent could not simply
justify her assessment by means of presumptions that the taxpayer had little or
no means to rebut. There, on the basis of inferences drawn from police
investigations, the Minister determined that the taxpayer personally gained
income from cocaine trafficking, and the Minister claimed GST on the presumed
income. I held that this was a case where, in my opinion, the burden of
proof was on the Minister. The decision was not appealed from.
[25]
In the instant case, I feel
that it is important to recall the settled principles concerning the burden of
proof — principles which, in fact, I repeated in Lavie.
The Federal Court of Appeal addressed the specific point in Orly Automobiles Inc. v. Canada,
[2005] F.C.J. No. 2116 (QL), at paragraph 20:
20 To sum up, we see no merit
in the submissions of the appellant that it no longer had the burden of
disproving the assumptions made by the Minister. We want to firmly and strongly
reassert the principle that the burden of proof put on the taxpayer is not to
be lightly, capriciously or casually shifted. There is a very simple and
pragmatic reason going back to over 80 years ago as to why the burden is on the
taxpayer: see Anderson Logging Co. v. British Columbia, (1925) S.C.R.
45, Pollock v. Canada (Minister of National Revenue) (1993), 161
N.R. 232 (F.C.A.), Vacation Villas of Collingwood Inc. v. Canada (1996), 133 D.L.R. (4th) 374 (F.C.A.), Anchor Pointe Energy
Ltd. v. Canada, 2003 FCA 294. It is the taxpayer's business. He knows how
and why it is run in a particular fashion rather than in some other ways. He
knows and possesses information that the Minister does not. He has information
within his reach and under his control. The taxation system is a self‑reporting
system. Any shifting of the taxpayer's burden to provide and to report
information that he knows or controls can compromise the integrity,
enforceability and, therefore, the credibility of the system. That being said,
we recognize that there are instances where the shifting of the burden may be
warranted. This is simply not one of those cases.
[26]
In this case, the
Appellant has been assessed on income from his business. Only Mr. Lavallée
knows how and why his business operates the way it does, and not in some other
manner. He knows and possesses information that the Minister does not. The Appellant
could have avoided an arbitrary assessment by keeping his purchase manifests,
and by keeping inventory consistent with his purchases and sales journals.
The Appellant had this information within his reach and under his control.
To shift the burden of proof and no longer require the Appellant to provide and
report the information that it knew, and to place the burden on the Minister,
would, in the instant case, "compromise the integrity, enforceability and
. . . credibility of the system", which is based on
self-assessment. This is why I am of the view that the instant case
differs from Lavie and that the burden is on the Appellant to show that
the assessments are not well-founded.
[27]
Given his attitude in
the past and during the period in issue, and owing to his contradictory
statements, Yves Lavallée, the person on whom the business depends, casts
serious doubts on the Appellant's assertions that it reported all its sales
during the period in issue. In 2000 and 2003, he admitted to
possessing tobacco products that he was not authorized to resell. During the
period in issue, he did not retain the purchase manifests, even though he
should have known that it was his duty to do so, particularly after having to
pay fines with respect to offences under the Tobacco Tax Act.
[28]
The discrepancy between
the purchase and sales journal and the warehouse inventory is also attributable
to his conduct. He alone was aware of the purchases and sales, and it was his
duty alone to faithfully transcribe all the transactions engaged in. The
explanations that he provided to the tax auditor did not justify the
discrepancies to any extent. Indeed, although Mr. Brûlé saw only two cases
at the warehouse on November 23, 2004, Mr. Lavallée spoke of seven or
nine cases. Even if the latter number was accurate, he had nothing to show
that he was transporting some fifteen cases in his truck that day. Given that
he was not insured, and that he reported no sales that week, it is very
unlikely that he was transporting the balance of the inventory with him. At the
hearing, he told the Court that the fact that there were 30 cases at the
warehouse on November 30, 2004, means that they were probably already
there on November 23, because there were no purchases between
November 23 and November 30, 2004. Yves Lavallée's versions are
at variance, and this certainly undermines his credibility.
[29]
The Minister has
followed two approaches and eventually found that the Appellant was not
reporting all its sales. The points that I have discussed above in my reasons
were taken into account in the assumptions on which the Minister based the
assessments. There were deficiencies in the inventories and the billing. The
fact that the Minister did not question the Appellant about its billing in the
past cannot be used by the Appellant as a justification for its laxity.
[30]
Although the methods
used by the Minister to reconstruct the unreported income can never be precise,
and are, by definition, arbitrary, I find that the Appellant has not shown me,
on a balance of probabilities, that the method used in the instant case was
unreasonable. The Minister determined, following two different approaches,
that the Appellant was not reporting all its income. The onus was on the
Appellant to prove that there was no justification for the estimate of the unreported income. The Appellant
was unable to make such a showing. In my view, its evidence was insufficient in
this regard. For these reasons, the appeals are dismissed and the assessments
are confirmed.
Signed at Montréal, Quebec, this 3rd day of December 2008.
"Lucie Lamarre"
Translation
certified true
on this 14th day
of May 2009.
François Brunet,
Reviser
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