Citation: 2006TCC503
Date: 20061019
Docket: 2001-3337(GST)G
BETWEEN:
BRASSERIE FUTURISTE DE LAVAL INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Dussault J.
[1] This is an appeal
from an assessment made under Part IX of the Excise Tax Act
for the period from May 1, 1994, to January 31, 1999.
[2] By this assessment,
the Goods and Services Tax (GST) reported by the Appellant was increased by $325,480.30
and the input tax credit (ITC) was increased by $10,647.79, which represents a $314,832.51 adjustment
to the net tax. The assessment also includes a $52,428.74 penalty, $38,818.36 in
interest and a $78,708.13 penalty for gross negligence, for a total of $484,787.74.
[3] The additional ITC
amount is not in dispute. Furthermore, the Appellant admits that $79,604.44 in
net tax was collected but not remitted (Exhibit A‑10). In addition,
Marc Bélanger, the Appellant's expert, established that the Appellant owed
an additional net amount of $14,542 in GST (Exhibit A‑28, at pages 6
and 7).
[4] The Appellant
operates a pub, which is also referred to as a restaurant pub, on Labelle Boulevard
in Ste‑Thérèse‑de‑Blainville, Quebec. The Appellant's
shareholders are Raymond and Michel Légaré.
[5] The Appellant
purchased the pub in 1989. Its fiscal years begin on May 1 and end on
April 30.
[6] The audit of the
Appellant's business was done by Hélène Morand. It began in October 1998. From
the outset, Ms. Morand noticed discrepancies between the tax that was reported,
and the tax that should have been reported based on the sales stated in the
financial statements (Exhibit I‑7).
[7] As far as the GST
is concerned, the total discrepancy for the audited period, factoring in the
additional ITCs that were allowed, is $79,604.44. As stated above, the
Appellant is not challenging this discrepancy between the GST that was reported,
and the GST that should have been reported having regard to the financial
statements that were filed.
[8] In order to begin
her audit, Ms. Morand obtained information from beer breweries and the Société
des alcools du Québec (SAQ) concerning all the Appellant's alcoholic beverage
purchases. I should immediately point out that the Appellant has admitted to Ms. Morand's
determinations regarding both the quantities and costs of those purchases.
[9] On October 7, 1998,
Ms. Morand and a colleague paid a surprise visit to the Appellant's establishment
and met with Michel Légaré, one of the shareholders. Mr. Légaré gave
them some explanations regarding the operation of the pub, and, in particular,
the tracking of sales and the sales reports that the business produced. The
Appellant did not keep any copies of bills for food sales. The Appellant used
the "Squirrel" computer system and software. The only report
produced by the computer was a report which each employee obtained at the end
of his or her shift and which enabled the employees to keep track of their
sales. The report stated the employee's overall sales and the amounts paid by
credit card and in cash. The report was attached to the cash that each employee
remitted in an envelope at the end of his or her shift. It provided no
details regarding the items sold, the unit prices or the quantities sold. Based
on the information obtained by Ms. Morand during her first visit, there
were no reports based on the individual bills either.
[10] As far as alcoholic
beverages were concerned, each waiter or waitress produced a handwritten report
setting out the quantities sold, the prices, and the total. Bottled beer and
wine sales were recorded by the unit, and special meters were used to keep
track of the sales of draft beer and wine on tap. The same person could produce
more than one report at the end of his shift because employees had to produce a
report each time the prices changed in order to take account of the many
promotions. Michel Légaré submitted a blank version of one of the reports
(Exhibit I‑9) to Ms. Morand. According to Mr. Légaré, none
of these daily reports of alcoholic beverage sales which the employees filled
out had been kept; they were all destroyed. Since Ms. Morand considered
these reports to be the proof of alcoholic beverage sales, and since no bills
were handed to patrons, Ms. Morand said that she asked Michel Légaré
to keep them at her very first meeting with him.
[11] At the same meeting,
Mr. Légaré also gave Ms. Morand a copy of a menu printed on a paper
place mat, based on which Ms. Morand confirmed that the 200% markup that she
used to determine the dollar amount of food sales was valid.
[12] Having obtained his
name, Ms. Morand contacted Robert Richard, the Appellant's accountant, on
October 21, 1998, to ask him to prepare all the documents necessary
for her audit in connection with the fiscal year from May 1, 1997, to
April 30, 1998, namely the general ledger, the general journal, the spreadsheet,
the bank statements, the purchase invoices and the vouchers used to track sales
— in short, all the relevant accounting documents along with
the GST and QST returns.
[13] Ms. Morand contacted
Mr. Richard again one week later to set an appointment for
November 5, 1998, in order to begin her audit.
[14] On November 4, 1998,
Ms. Morand returned to the pub to ensure that Michel Légaré was actually
keeping the detailed reports of alcoholic beverage sales filled out by the
employees, as she had requested that he do upon her first visit to the
business. She says that Michel Légaré told her that his father, Raymond Légaré,
had thrown them all out. Ms. Morand emphasized the importance of keeping
these reports, repeated her request that they be kept, and notified Michel Légaré
that she would be returning to ensure that they were indeed being kept.
[15] Thus, when
Ms. Morand commenced her audit at the office of Mr. Richard, the
accountant, on November 5, 1998, she had no reports concerning sales
of alcoholic beverages, and no detailed reports concerning meal sales. Indeed,
on December 1, 1998, letters of requirement (Exhibits I‑14 and
I‑15) were sent to Raymond and Michel Légaré directing them to produce
these documents.
[16] Ms. Morand explained
that she began her audit at Mr. Richard's office with the accounting
records for the period from May 1, 1997, to April 30, 1998, and the purchase
invoices that were filed by month in envelopes. She said that she found
invoices related to expenses paid by cheque and expenses paid in cash, and many — literally
hundreds, in fact — of [TRANSLATION] "small
papers and bits of place mats" referring to cash payments, including wage
payments (Exhibits I‑11, I‑12 and I‑13). Indeed, some of
these "bits of paper" bear no names or refer only to a first name or
to the "DJ" or "doorman" and the amount paid. One of these
documents adduced in evidence actually states very explicitly that the payment
was made [TRANSLATION] "under the table" (Exhibit I‑13, at
page 7.191).
[17] According to Ms. Morand,
certain documents also show that the Appellant collected cover charges
some nights, such as Thursdays, when there would sometimes be a singer or other
entertainment, and that certain people were paid from these cover charges (Exhibit I‑11,
at pages 7.162 and 7.164). These documents refer to cover charge receipts
of $2,880 and $2,790, but other documents, namely weekly reports called [TRANSLATION]
"deposit controls", state that these cover charges, called [TRANSLATION]
"door revenues", consistently amounted to $2,000 per week over several
weeks (Exhibit I‑28, at pages 35 to 38), whereas others, still, make
no reference to income of this type (Exhibit I‑28, at pages 31 to 34).
But these are not the only startling features of these sample reports. For example,
reports concerning sales of alcoholic beverages state round figures such $1,500,
$2,000, $2,500 or $3,500 (Exhibit I‑28, at pages 35 to 38). Two
reports for two different one‑week periods are even more surprising; they
contain exactly the same amounts for five different line items (Exhibit I‑28,
at pages 33 and 34). Both of these reports were prepared by Raymond Légaré
and were tendered in evidence, during his testimony, as examples of reports
that he filled out and submitted to the accountant Robert Richard (Exhibits A‑3
and A‑4).
[18] As far as wages are
concerned, Ms. Morand explained that she asked the accountant Mr. Richard for
the payroll journal, and that Raymond Légaré came to meet her at
Mr. Richard's office one day and showed her the journal but did not leave
it with her so that she could inspect it. Thus, she could not verify what had
been entered and what had not been. As for the other expenses that were paid in
cash and entered on the "bits of paper", sometimes stapled together
with a descriptive sheet (Exhibit I-12, at pages 7.168 and 7.169), Ms. Morand
says that she was generally unable to reconcile them with the accounting
records provided. Ms. Morand also said that she found invoices for personal
expenses (Exhibit I‑12, at pages 7.172 and 7.185).
[19] In November 1998,
Ms. Morand continued her audit on Mr. Richard's premises. In early
December, she received the first daily reports prepared by employees in
connection with the sale of alcoholic beverages over the course of approximately
four weeks (Exhibit I‑9). Along with these reports, she received a
few printouts from the BERG metering system that was used to track sales of
spirits, despite having asked for all of them (Exhibits I‑16 and I‑17).
[20] Ms. Morand
decided to extend the audit period by three months — that is to say, until
January 31, 1999 — so that she could obtain all of the
daily beverage sales reports and audit them for this period rather than for a
single month. Having commenced her work and discovered what she called
[TRANSLATION] "substantial discrepancies" in relation to the reported
taxes, Ms. Morand also decided that her audit would cover a period
commencing May 1, 1994.
[21] Ms. Morand always
contacted Mr. Richard, the accountant, to obtain the documents necessary for
her audit (Exhibits I‑17 and I‑18). Although the detailed meal
sales reports produced with the Squirrel software were requested in a letter of
requirement dated December 1, 1998 (Exhibits I‑14 and I‑15), Ms. Morand
asked for them again on December 4 and December 22, 1998 (Exhibits I‑17
and I‑18). She explained that she did so because Michel Légaré told
her that he had no detailed daily computerized food or meal sales reports generated
by the Squirrel software, but gave her the name of the person responsible for
the system for the pub, and said that this person had told him that such
reports could be generated with the software. Ms. Morand was initially
thinking of asking for 30 days' worth of such documents, but since they were equivalent
to detailed bills for each day, at the end of the day she decided to limit her
request to 10 days chosen at random for each of the periods of April 1997
and April 1998, because the material she had initially thought of
requesting would have been too voluminous.
[22] Ms. Morand said
that she was never able to obtain what she needed in order to verify exactly
what food had been sold, and at what price. She explained that she
obtained 26 daily computerized reports in the course of her audit, namely the
reports from August 6 to August 31, 1996 (Exhibit I‑19).
These reports only break down the total sales for each day by general
category, such as breakfasts, salads/appetizers, main dishes, pizza, table
d'hôte or desserts, and state the total food sales for the day, so it is,
in fact, impossible to know what items were sold, how many of each item were
sold, and at what price each item was sold. The daily reports also state
the total amount of alcoholic beverage sales by category: beer, wine and
spirits. Ms. Morand explained that she had initially been told that the
computer system was used only for meal sales.
[23] Since Ms. Morand was
unable to obtain the detailed bills or reports for food sales, she decided to reconstruct
the sales by marking up the food purchases by 200%, minus 5% for losses, and
she validated this method using documents that she was able to obtain. By
applying this method, she determined that, for the fiscal year ended April
30, 1997, the $442,044 in purchases generated $839,884 in sales, whereas
the Appellant reported only $547,672 in sales for that fiscal year.
[24] Moreover, according
to the 26 computerized daily reports, the food sales for the 26 days of
August 1996 totalled $61,232.31. Ms. Morand explained that by
extrapolating this total to 365 days, she determined that the food sales must
have amounted to roughly $859,000 for the fiscal year ended April 30, 1997
(Exhibit I‑20). In fact, this amount tended to confirm that the 200%
markup that she used was not [TRANSLATION] "outside the norm."
[25] According to Ms. Morand,
the 200% markup of food purchases was the minimum markup applied to the
restaurant industry by the auditor groups specialized in restaurants (she was a
member of such a group) to determine the amount of taxes due in cases where an
agent did not have the requisite documents.
[26] Using the menu that Michel Légaré
had given her upon her first visit to the pub, Ms. Morand also determined
that the selling prices of certain easily determinable items were higher than
the 200% markup on cost, and she made this determination in order not to
penalize the Appellant by uniformly applying such a markup to food (Exhibits I‑10,
and I‑24 to I‑28).
[27] Thus, since she was
unable to obtain meal bills or other documents (computerized or otherwise) on
the basis of which the items sold and the quantities and prices could be ascertained,
Ms. Morand had to settle for a uniform markup rate because she was unable
to determine a specific markup rate for each food item sold. Hence, the same
markup of 200% minus 5% for losses was applied to the purchases for each year within
the period from May 1, 1994, to January 31, 1999. This purchase
amount was adjusted to take account of inventory variations. As I have stated,
the total purchases for the entire period, as determined by Ms. Morand, were admitted to by the
Appellant.
[28] For the last nine
months, that is to say, from May 1, 1998, to
January 31, 1999, Ms. Morand noticed that the meal revenues reported
in the Appellant's books amounted to $764,562 (Exhibit I‑28, at page 24),
while she herself had determined that those revenues amounted to $782,437.86 using
the 200% markup on purchases less 5% (Exhibit I‑28, at page 1).
Thus, the sales amount that resulted from the method used was close to the sales
amount entered in the books for this nine-month period.
[29] The situation that
Ms. Morand faced in connection with alcoholic beverage sales was different
because, after making her second request to Michel Légaré, she finally
obtained close to three months' worth of daily reports filled out by the
employees, that is to say, the reports filled out from
November 7, 1998, to January 31, 1999. As stated
above, at the commencement of her audit, Ms. Morand had obtained the exact
amount of the Appellant's purchases directly from breweries and the SAQ. This
led to her finding that not all the Appellant's purchases from the SAQ were to
be found in its financial statements. The SAQ purchases that were not
entered into the statements were paid for in cash, and no ITCs were claimed in
respect of them. As I also stated, additional ITCs were granted to the
Appellant, who admitted that it made these additional purchases at the SAQ.
[30] In order to obtain a
14‑day sample, Ms. Morand used some 146 daily alcoholic
beverage sales reports filled out by the Appellant's employees and submitted in
respect of the period from November 7, 1998, to
January 31, 1999. By choosing one day from each week on a
rotating basis — for example, Monday the first
week, Tuesday the second week, Wednesday the third week, and so on —she
made sure that she chose two instances of each day of the week during this
period, which was just short of three months in duration. For each of these
days selected, she compiled the details regarding the sales of each item sold, as
well as the price and quantity sold, in order to determine the average prices of
beer sold in different forms and the average markup percentages for wine and
spirits. This process made it possible to account for the frequent price
variations in the course of a single day or from one day of the week to another,
and thereby reflected the many promotions offered by the Appellant, such as
happy hours, which was from 4:00 to 7:00 p.m. Once the average prices
or markup percentages were calculated on the basis of this sampling, Ms. Morand
reconstructed the sales for each fiscal year in the audit period on the basis of
purchases made during each period, since she had no documents on the basis of which
the average prices or markups for these periods could be determined. However,
adjustments were made to take account of inflation during each fiscal year or
part thereof (Exhibits I‑24 to I‑28).
[31] During her
testimony, Ms. Morand provided a detailed explanation of all the
calculations that were done, and said that, based on her experience, the
markups that were decided upon were not too high. Thus, for example, she arrived
at a weighted markup of 345.26% for liquor, but said that an
"ordinary" restaurant would have a 500% markup.
[32] As mentioned above, Ms. Morand
discovered some evidence suggesting that not all cover charge revenue, or
[TRANSLATION] "door income", had been reported. She increased this
revenue by the same factor by which she had increased alcoholic beverage and
meal sales in relation to the amounts reported in the financial statements for
the fiscal years that ended on April 30, 1996, 1997 and 1998, and the
amounts posted to the general ledger for the period from May 1, 1998,
to January 31, 1999 (Exhibits I‑25 to I‑28). The Appellant
did not charge a cover during the fiscal year that ended on April 30, 1995
(Exhibit I‑24).
[33] After reconstructing
the total sales, Ms. Morand determined the difference between the GST
actually payable on the sales and the GST payable according to the financial
statements, as well as the difference between the GST payable according to the
financial statements and the GST reported by the Appellant (Exhibit I‑22).
[34] The draft assessment
was submitted to Michel Légaré and to Mr. Richard, the Appellant's
accountant, on June 29, 1999 (Exhibit I‑21).
[35] On
cross-examination, Ms. Morand said that when she submitted her draft
assessment, Mr. Richard reacted by saying: [TRANSLATION] "This is beyond
reason." She explained that she had told them that the Appellant's accounting
records were incomplete and that she was therefore going to have to use substitute techniques.
She gave them 21 days to provide any new facts. She said that Mr. Légaré
and Mr. Richard responded to this offer by saying that they were prepared to
provide her with the requested documents from the Squirrel software; however,
she said that no new documents were provided to her during that time, nor
during the additional time which Mr. Richard requested in July and which she
granted on account of the summer holidays. Ms. Morand said that she would
have analyzed any documents provided, instead of using those substitute
methods, which disclosed that approximately $3.3 million in sales had not been
reported during the period from May 1, 1994, to
January 31, 1999.
[36] Ms. Morand said
that she used the documents that she was given, documents that covered 26 days
in August 1996, to determine that the sales of meals over a 365‑day
period would have been $859,607.43, but that this amount was not actually used,
except to confirm her calculations, which were based on a 200% markup on food
purchases, less 5% for losses (Exhibits I‑19 and I‑20).
[37] Counsel for the
Appellant tried to make Ms. Morand admit that the Appellant cannot
possibly have sold certain items for 200% of cost — for example, two hot
dogs for $0.25 on Mondays, chicken wings for $0.25 a piece on Thursdays, pizza
for $1.99 on Tuesdays, or all-you-can-eat fondue chinoise for $9.95 on
Sundays. Ms. Morand admitted that not all items were necessarily sold at
200% of cost, and that the $0.25 for two hot dogs might be an illustration, but
she said that, generally, she could not answer the question because, first of
all, she never obtained the documents that would have made it possible to check
into this, and secondly, she was never told about these reduced prices, and
therefore proceeded to audit certain items based on the menu prices that she
was provided with upon her first visit (Exhibit I‑10), having
received no other documents. Thus, Ms. Morand was unaware of the
reduced prices stated on Exhibits A‑23 and A‑24, as confirmed
by the note at the bottom of the first page of Exhibits I‑24 to I‑28.
When Ms. Morand was asked the hypothetical question whether the results
would have been different if she had received all the required documents, she simply
answered that she did not know, but that if those documents had been available,
she would surely have used them instead of applying a 200% markup less 5% for
losses.
[38] When counsel for the
Appellant asked Ms. Morand why she did not account for thefts of drinks or
food, Ms. Morand explained that she was never told about any thefts from the
Appellant's establishment, was never given a shred of evidence of such thefts
(such as police reports) and was not going to create any. In her
submission, the 5% reduction of the meals markup took
"complimentary items", losses and promotions into account. With
respect to alcoholic beverage sales, she said that the average prices that she
determined took all of these factors into account. As for her 14‑day
sampling to determine the average drink prices, she noted that she used each
day of the week twice over a roughly 12‑week period for which the
Appellant had kept the relevant documents, which represented 16%, 17% or 18% of
the days during this sole period that could be checked.
[39] On the subject of
cover charges, Ms. Morand reiterated that since she was given no control
documents or other records, she increased the amounts posted to the financial
statements by the same factor applied to the total food and beverage sales, in
order to increase those amounts in relation to those entered into the financial
statements.
[40] With respect to her request
for detailed meal sales reports produced with the Squirrel software, Ms. Morand
explained that she ultimately requested detailed reports for only two ten-day
periods selected at random from two different fiscal years, because it would
have been unthinkable for her to ask for a copy of an individual bill or report
for each transaction during the four years since the Appellant began using the
software (Exhibit I-18). However, she said that, using such sampling,
these detailed bills or reports, which she never obtained, would have allowed
her to ascertain exactly what was sold and at what prices.
[41] Ms. Morand said
that she had audited just one other pub, which was located near a university in
Montréal. She said that the only difference that she noticed was that there
were more parking spaces at the Appellant's pub in Ste‑Thérèse.
[42] The following people
testified for the Appellant:
·
Raymond Légaré, a shareholder
of the Appellant,
·
Robert Richard, a
chartered accountant, and the Appellant's accountant until the year 2000,
·
Annie Latreille, an
employee of the Ministère du Revenu du Québec,
·
Mario Gratton, the
Appellant's accountant since the year 2000,
·
Michel Légaré, a shareholder
of the Appellant,
·
Marc Bélanger, a
chartered accountant and the Appellant's expert witness.
[43] In his testimony,
Raymond Légaré discussed his experience in the tavern and pub business.
Having worked weekends in taverns owned by his father and brother while employed
on a permanent basis by Molson as a delivery person, he purchased his first pub
in Laval through the Appellant
in 1973. The pub was kept for about 15 years and then resold, and the
Appellant purchased a new establishment in Dorval which was only kept for two
years. The Appellant's current place of business was purchased in 1989. It was
the interest shown by his son Michel that prompted Raymond Légaré to
purchase the most recent pub, located on Labelle Boulevard in Ste‑Thérèse,
not far from highways 13, 15 and 640. According to Raymond Légaré, the pub
was patronized by businessmen from the neighbouring municipalities, as well as labourers,
and students from Cégep Lionel‑Groulx, which was nearby.
[44] At the time of the
purchase, beer sales were high, and the pub had roughly ten employees assigned
to beer sales, and ten to fifteen other employees assigned to meal sales. Raymond Légaré
explained that he had the experience needed to manage beer sales, but that, as
to the two pubs he had previously purchased he had had problems and even losses
involving food sales, so it was agreed that his son Michel would look
after the management of that part of the business.
[45] According to Raymond Légaré,
pub customers want fast and courteous service, good food and moderate prices,
and he was able to offer this with competitive pricing thanks to the many
promotions offered by his son Michel — promotions that
attracted more customers and boosted alcoholic beverage sales. Mr. Légaré explained
that in light of this, he did not expect profits on food sales, but simply
asked that there be no losses on such sales. In his view, the 200% markup on
food purchases which Ms. Morand used was not an option, because he had to
keep his pricing competitive in view of the numerous restaurants that were
opening in the area.
[46] Mr. Légaré said that
as part of his management of the business, he tracked sales of the various alcoholic
beverages using detailed reports submitted by the employees. He explained that
he compiled the sales recorded on these reports on a daily sheet on which he
also entered the expenses paid in cash, and that he submitted this compilation
to Mr. Richard, the accountant. Mr. Légaré said that since all the
sales were entered and accounted for, and the revenues were deposited, there
was no way that the Department's allegation that some $3.5 million worth of
sales went
unreported could be correct; in this regard, he noted that his numbers
definitely were not used for such calculations. He said that even the amounts
that he earned from the video poker machines installed in the pub were
deposited as business income. Although he initially asserted that all the
expenses were paid for by cheque, he later admitted that some purchases from
the SAQ were made partly in cash, especially in the beginning, because he was
not authorized to pay more than a certain amount by cheque. Thus, the remainder
had to be paid in cash. This authorization limit imposed by the SAQ on cheques
that it accepted was supposedly increased each year and eventually disappeared
completely.
[47] Raymond Légaré also
admitted that certain employees, such as students who worked when additional staff
was needed — on Thursdays, for example — were also paid in cash.
Mr. Légaré said that these cash payments were also entered as expenses.
[48] Counsel for the
Appellant questioned Mr. Légaré about his assets and lifestyle. Counsel's
reasoning behind these questions was that since the Appellant had been assessed
for $3.5 million in unreported sales, some trace of these millions would have
to be found somewhere. Mr. Légaré said that, apart from the pub, which
actually had a $1 million liability secured by a hypothec, he had no other
assets in Quebec or abroad. His family residence, which was purchased for
$190,000, belonged to his spouse. Mr. Légaré said that he owns only one
car, a 2002 Cadillac purchased with financing from the Royal Bank. As for
travel, he testified that he normally takes a vacation in February, when he
stays with his sister-in-law in Florida. He mentioned only one other trip, a
promotional trip to Texas paid for by Molson.
[49] Counsel for the
Appellant also questioned Raymond Légaré briefly about the Squirrel software
which his son Michel brought into the pub in May 1996 to do accounting in
relation to meal sales. Raymond Légaré simply said that each food item
sold at the pub was recorded in the computer system.
[50] Counsel for the
Appellant also dealt with the question of the search and seizure that occurred
on April 12, 2000, the day after the assessment in issue. Mr. Légaré said
that he was not on the premises at the time of the search, but that he was told
that there were 15‑20 police officers there; they seized everything in
the filing cabinet and the Squirrel system, and the Appellant was suspected of
"zapping" (erasing data).
[51] On cross-examination,
Mr. Légaré, who had said that he was at the pub 15‑16 hours a day,
corrected his statements and said that this was the case in the beginning, but
that, from 1994 to 1999, he arrived around noon every day, and stayed much less
time than he had done in the beginning.
[52] Mr. Légaré explained
again the system that was implemented to track sales of alcoholic beverages: the
number of beer bottles in the refrigerator allocated to each employee who sold
alcoholic beverages was counted, and each such employee used special meters for
draft beer, wine on tap, and spirits, and had to submit a detailed sales report
at the end of his shift or whenever the price changed in the course of his
shift. The report stated the quantities of each item sold, the price, the
total, and the cash remitted in an envelope. The report took any promotions into
account.
[53] Mr. Légaré explained
that, after checking the employee reports, he entered the totals of each item
sold in a daily sheet that was later remitted to Mr. Richard, the
accountant. He said that the employee reports were simply destroyed after being
used.
[54] Raymond Légaré then
explained the mechanism for tracking food sales. First of all, the
employees assigned to food service only looked after food sales, since other
employees were assigned solely to the sale of alcoholic beverages. Each employee
assigned to food sales had to remit an envelope bearing the total sold and the
cash payments, with a copy of each numbered bill that contained the customer's
order and was given to the kitchen. My understanding is that this was a
duplicate of the bill handed to the customer. Mr. Légaré said that it was
these bills that enabled him to track food sales, and that he did the daily compilations
of all sales. He explained that he had kept all these bills in boxes and
remitted them to the auditor, Ms. Morand. According to Mr. Légaré, this
was the control system in place until the Squirrel computer system, which he
was not involved with, was introduced. In fact, the computer system was
introduced in May 1996. Mr. Légaré said that he had actually stopped
looking after the tracking of food sales shortly before that.
[55] Raymond Légaré's
testimony on his involvement in the management of the pub during the period
covered by the audit is rather confusing. Given his frequently imprecise or
even contradictory statements, it is very difficult to know exactly to what
extent he was involved, what controls he did, and what documents he filled out
in relation to the tasks carried out by his son Michel in this regard.
[56] Raymond Légaré offered
no meal bills, employee reports, or daily or weekly meal compilations in
evidence. He offered only two drink compilations, which turned out to be
weekly, not daily ones (Exhibits A‑3 and A‑4). These documents
were also offered in evidence by the Respondent, and I have already referred to
them at paragraph 17 of these Reasons for Judgment. (Both documents are shown
as part of Exhibits I‑25 to I‑28). Although these documents
cover two different one‑week periods, that is to say, May 19 to
May 25, 1996, and May 26 to June 1, 1996, it can be
seen, as I have noted earlier, that the amounts entered for five different line
items are exactly identical for both weeks. The details are as follows:
|
|
Draft sales
Bottle sales
Liquor sales
Wine sales
Wine sales
|
$19,618.75
$5,688.50
$1,342.00
$297.25
$2,911.25
|
|
[57] Since the amounts
for the other line items are different, it is rather difficult to believe that
this was a mistake. In addition, these documents contain no compilation concerning
meal sales. Mr. Légaré explained that this is probably because the
Squirrel system was already in place at that time.
[58] With respect to
cover charges, Raymond Légaré simply stated that there were none in
the beginning and that his son Michel introduced them and looked after that
aspect of the business.
[59] Robert Richard is
a chartered accountant. He did the Appellant's bookkeeping and prepared its
financial statements from 1980 to 2000. He had no auditing mandate. The
Appellant's financial statements for the fiscal years that ended on
April 30, 1995, 1996, 1997 and 1998, were offered in evidence (Exhibits A‑6
to A‑9). Mr. Richard also prepared Raymond and Michel Légaré's
income tax returns.
[60] Mr. Richard explained
that he would receive two separate compilations to account for the Appellant's
receipts: one concerning alcohol sales, and the other concerning meal sales. He
said that the meal sales compilations were primarily weekly summaries of the
total daily sales (Exhibit A‑5). From 1996 onward, they were
computer printouts. With respect to alcohol sales, Mr. Richard said that
the compilation that he was given corresponded to the documents that have just been
mentioned, and that were offered in evidence by Raymond Légaré (Exhibits A‑3
and A‑4). Mr. Richard acknowledged that there were discrepancies
between the taxes reported quarterly and the taxes payable according to the
financial statements. He said that he knew about the discrepancies, which
were actually entered in the books, and that he would have given Ms. Morand
all the explanations that she would have needed if she had raised this question
at the beginning of her audit, which she did not.
[61] According to Mr. Richard,
the Appellant simply cannot have failed to report $3.5 million in sales during
the period covered by the audit because there was no trace of this money among
the assets of the directors or elsewhere. His comment was [TRANSLATION]
"This is beyond reason."
[62] Noting that he had
been the business's accountant for 20 years, he placed particular emphasis on
the fact that a 200% markup on the food purchases was completely unreasonable
for a pub in which Raymond Légaré always tried to maintain the lowest
prices possible by means of numerous promotions and without really being
concerned about controlling costs. He said that although the pub was profitable
from the moment it was purchased and became more profitable thanks to
expansions, advertising and promotions, its gross profit was in the 48‑50%
range. He said that he has never seen a pub make a gross profit of 70% or 75%.
[63] In addition, Mr.
Richard acknowledged that some cash purchases might not have been accounted
for, but he said that the sales were accounted for, which meant that the only
impact was on the ITCs. He also discussed errors in attributing lottery earnings
and "complimentary items" amounts to line items in the general
ledger, and said that he made adjusting entries each year in order to prepare
the financial statements, in particular because all the revenues, except food,
were lumped together and were only broken down at the end of the year by Raymond Légaré,
who was primarily responsible for the financial aspects of the business.
Another problem stemmed from the fact that the bank deposit totals
exceeded the sales amounts entered in the books, thereby necessitating year‑end
adjusting entries.
[64] With regard to Ms. Morand's
audit, Mr. Richard said that he tried, despite some confusion, to comply with
all her requests for documents, which he passed along to Michel Légaré. He
said that the requests were primarily for computerized documents from the
Squirrel system and that Ms. Morand did not ask for bills issued prior to
the installation of that system in the pub.
[65] On cross-examination,
Mr. Richard admitted that despite the adjusting entries in the accounting books
and the notes in the financial statements, a significant amount of
unreported and unremitted taxes accumulated year after year during the period
covered by the audit. As to the GST alone, $79,604.44, the amount of has
already been noted, and the Appellant admits to it. This amount is included in
the total assessment of $314.832.51.
[66] Mr. Richard said
that he discussed this issue of unreported and unremitted taxes that
accumulated year after year with Raymond Légaré, but that Mr. Légaré did
not issue cheques in payment. However, Mr. Richard acknowledged that he should
have personally corrected the situation involving the tax returns and notified
the Department of the situation.
[67] Mr. Richard specified
that the reports that Ms. Morand requested were reports generated by the
Squirrel system for a sampling period, and that they were provided. He
explained that he was somewhat confused because he did not really know or
understand what she was looking for, because she simply told him that she was
doing a [TRANSLATION] "statutory audit."
[68] On cross-examination,
Mr. Richard stated that the only things he had at his disposal to account for
drink sales and then prepare the financial statements were the weekly reports
prepared by Raymond Légaré (Exhibits A‑3 and A‑4) and
certain "complimentary" item slips that Raymond Légaré would give
him. He was unable to specify how the year-end reconciliation was done. He
admitted that he had never verified the employees' daily reports, which Mr. Légaré
purportedly used to prepare his weekly reports. He added that he only worked
with the documents that he was given. Although the weekly reports offered in
evidence as Exhibits A‑3 and A‑4 also show certain expenses
paid in cash for which receipts were supposedly attached, Mr. Richard acknowledged
that the cash purchases from the SAQ were not entered up in them, and that he
received no document evidencing those purchases. For food sales, he said that
he used a report prepared by an employee (Exhibit A‑5) and documents
generated by the Squirrel system, but he did not specify exactly which ones.
[69] Annie Latreille is an
auditor with the Ministère du Revenu du Québec.
[70] On April 7, 2000,
on the basis of a report by Claude Hébert, an investigator with the Ministère
du Revenu du Québec, a warrant of search and seizure was issued against the
Appellant covering all documents related to his business (Exhibit A‑13).
The warrant was executed on April 12, 2000, and 36 boxes of
documents and other items, such as computer monitors and software, were seized (Exhibit A‑12).
I should note that the notice of assessment in issue is dated
April 11, 2000 (Exhibit A‑1). Mr. Hébert initiated the
audit to determine whether the Appellant was guilty of tax offences, and, in
particular, the offences set out in paragraph 327(1)(a) of the Act.
Ms. Latreille apparently took over the matter from Mr. Hébert in 2001,
roughly one year after the search and seizure, although her testimony on the
subject was somewhat vague. Lastly, the Appellant and Michel Légaré were
accused of failing to report, and attempting to evade the payment of, $61,946.59
in GST, an amount equal to the difference between the tax reported and the tax
owed according to the books and financial statements for the years 1995 to 1998
inclusive. A motion for non-suit was brought by the Appellant and Michel Légaré;
it was granted, and the proceedings ended in an acquittal on
April 27, 2004, notably because of a lack of evidence of culpable
intent (Exhibit A‑11).
[71] Ms. Latreille's
testimony was rather vague and confused and did not contribute much to the
Court's understanding. However, counsel for the Appellant considered it very
important to emphasize the enormous difference between the amount of the
criminal prosecution, namely $61,946.59, and the $314,832.51 adjustment to the
net tax in the assessment in issue (Exhibit A‑1).
[72] Mario Gratton has
been the Appellant's accountant since 2000. Although he is not a chartered
accountant, he claims to have 22 years of experience in accounting. He
explained that he recovered the Fortune 1000 accounting software diskettes
used by his predecessor, Mr. Richard, for the years 1995 to 1998, in order
to conduct various analyses so that he could determine, among other things, the
gross margin, and whether profits were consistent.
[73] Mr. Gratton determined
the gross margins on a category-by-category basis, specifically "food
service", "beer and draft" and "wine and liquor", for
the years 1995 to 2004, by comparing the percentages resulting from Ms. Morand's
calculation of the reconstructed sales; those established by Marc Bélanger,
a partner with the firm of Dallaire Forest Kirouac, which the
Appellant retained as an expert; and, lastly, those established in accordance
with the Appellant's accounting records (Exhibit A‑14). I would
simply point out that Ms. Morand's calculations were obviously limited to
the period from May 1, 1994, to January 31, 1999.
[74] According to Mr. Gratton,
the major variations from one category to another category, which can be seen
by examining the Appellant's books, particularly in 1995, 1996 and 1997, occurred
because sales were charged incorrectly. For example, some sales in the
"food service" category should have been entered in the "beer
and draft" or "liquor/wine" category, or vice-versa. However,
Mr. Gratton says that there is a certain degree of stability in the gross
profit margins for all the categories from 1998 to 2004. In addition, according
to the Appellant's books, the Appellant's gross profit margins for the
"food service" category varied from 28% to 37%, the margins for the
"beer and draft" category varied from 45% to 70%, and the margins for
the "liquor/wine" category varied from 41% to 57% during those years.
No reference was made to the cover charges.
[75] Mr. Gratton explained
that his own accounting was much sounder, and that work was done every month,
using, among other things, the sales journal, supplier invoices and deposit
books, to ensure that the appropriate amounts were posted to the correct line
items. In his determination, these new control measures reduced the variations
from 2001 to 2004.
[76] With respect to the
cost of the goods sold, Mr. Gratton said that Ms. Morand's calculations
placed them at 36% for 1995, 34% for 1996, 37% for 1997 and 34% for 1998,
whereas the Appellant's financial statements place them at 47%, 52%, 51% and
51% for each of those respective years (Exhibit A‑15). Based on
these calculations, he asserts that the percentages resulting from the figures arrived
at by Ms. Morand were [TRANSLATION] "outlandish" because restaurant
cost prices vary from 47% to 52%, which puts them in the 50% range.
[77] Mr. Gratton then
proceeded to determine the Appellant's general gross profit margin, in
percentage terms, for the years 1995 to 2003, on the basis of the financial
statements. That margin varies from 48% to 53% depending on the year (Exhibit A‑15).
Therefore, at the end of the day, he concluded that the general gross profit
percentage was constant throughout a nine-year period.
[78] When the Appellant's
counsel asked Mr. Gratton a question about the possible effect of adding
$3.5 million in sales during the period covered by the audit, Mr. Gratton
answered that, first of all, this was outlandish and impossible because the pub
did not have enough space to serve the additional customers that this amount
would represent, and secondly, that the gross profit percentage was not
constant, and varied significantly from 1998 to 2004. However, Mr. Gratton
acknowledged that something must have happened in 1995, 1996 and 1997,
[TRANSLATION] "perhaps with respect to charging," but that he could
not answer in the place of the accountant who preceded him.
[79] On examination in
chief, Mr. Gratton explained that, in 2000, when he began looking
after the Appellant's accounting, the Appellant had hired a manager responsible
for organizing the internal controls, and that he, Mr. Gratton, had implemented
tighter and more efficient control mechanisms. For example, although he
acknowledged that the report forms that employees began having to fill out for
drink and food sales after his arrival (Exhibits A‑19 and A‑20)
were similar to the forms that had been used beforehand (Exhibits A‑3,
A‑4 and A‑5), he explained that he met with the employees
responsible for filling them out in order to ensure that they did so properly.
[80] However, with
respect to the earlier numbers that he recovered thanks to Mr. Richard's
Fortune 1000 diskettes, he said that all the numbers were there, that all the
sales had been recorded and that the problem was mostly with the data entry by
Mr. Richard's office, which resulted in sales being charged incorrectly.
[81] Michel Légaré is
a shareholder and director of the Appellant. He says that the pub's clientele
includes many students, but that businesspeople and families also patronize the
establishment. Due in part to the large student customer base, he says that he
emphasized low prices and promotions, especially on Thursday evenings. He says
that his father managed the business and that he focussed more on welcoming customers
to the pub, customer contact, promotions and shows.
[82] In his testimony, Michel Légaré
also explained the metering system for alcoholic beverage sales, and spoke
about the inventory or control reports that employees filled out daily. He said
that a daily or weekly compilation of these reports was submitted to the
accountant every month. If I understand Mr. Légaré's initial explanations,
after the Squirrel system was installed in May 1996, the compilations
that stated the totals for each category of alcoholic beverage were entered in
the Squirrel system. As far as food was concerned, the orders were entered through
the Squirrel software's touch screens, which generated an individual bill. At
the end of their work shift, each of the employees obtained their food totals from
the system, broken down by general category, and submitted an envelope
containing the cash that they had received. In addition, a monthly summary of
everything that had been entered into the computer, broken down by general
category (such as the number and total amount of breakfasts, tables d'hôte,
pizzas, and so forth) could be obtained. The summary also stated the
totals for beer, wine and other alcoholic beverages. According to Michel Légaré,
these monthly summaries were available during Ms. Morand's audit and were
among the documents seized (Exhibit A‑21). However, according to Mr. Légaré,
Ms. Morand wanted to check the individual bills for food sales, bills
which the system could not generate after the day ended because it [TRANSLATION]
"shut itself down". He said that he himself did not know how to
produce the individual bills after a day ended, and that he then referred Ms. Morand
to a certain Mr. Goulet, who had sold him the Squirrel system. According
to Mr. Légaré, Ms. Morand did not seem to be satisfied with the Squirrel
system's reports and the Ministère du Revenu du Québec was insinuating that
some "zapping" had taken place. However, after keeping the seized
computers and documents for three years, the Ministère gave them back to the
Appellant — in poor condition — without being able to
point to anything at all that was irregular. From that point onward, the
Appellant has no longer been using the computer, and has kept all the
individual handwritten bills.
[83] With the help of
three documents, entitled "Évènements thématiques"
[themed events] (Exhibit A‑22), "Activités de la semaine"
[activities of the week] (Exhibit A‑23) and a menu for May and June 1997
(Exhibit A‑24), Michel Légaré discussed the many price
reductions, both for alcohol and for food, which were offered each day
throughout the year to attract customers. With respect to the alcoholic
beverages, he emphasized, among other things, Thursday or Friday promotions
during student parties or evenings, at which time draft beer, liquor and
"shooters" were sold for $0.99, "beat the clock" parties on
Saturdays at which the prices began at $0.25 and increased by $0.25 every
half-hour until they hit $2.00, as well as reduced (two‑for‑one)
pricing from 4 p.m. to 7 p.m., "toonie" nights
($2 cover, $2 beer and $2 liquor), reduced pricing for baseball
or hockey league players, or during evenings with singers or DJs or during
themed events, and so forth. Price reductions on food were just as numerous: in
addition to five "specials" each day that included dessert and coffee
and were offered at $3.50 to $7.00, there were two hot dogs for a quarter on
Mondays, $1.99 pizza on Tuesdays, $1.50 spaghetti on Wednesdays, all-you-can-eat
fondue chinoise for $9.95 on weekends, and so forth. According to Michel Légaré,
several of these discounted food items were "loss leaders". If the
pub lost money on food, it attracted customers, increased the crowds, and,
obviously, sold more alcoholic beverages.
[84] Michel Légaré
also discussed the birthday party, which was held under a big top in the
parking lot and featured guest artists. They sold as many as 20,000 glasses of
beer in a single day at $0.75 per glass at that event. Mr. Légaré compared
this price with the price of $2.11 per glass that Ms. Morand had
calculated. He also referred to other parties or festivals, such as the lobster
festival, where he sold some 2,000 pounds of lobster per week and did not even
make a dollar in profit per plate, and this was when he did not lose money
outright.
[85] Mr. Légaré also
discussed the thefts of food and drink and the money that employees swiped from
the cash that was used to feed the video poker machines. Although he provided a
few examples of theft, he did not volunteer how much money was lost annually or
during the period covered by the audit.
[86] Michel Légaré
explained that in view of the numerous special events and parties of all kinds,
no two weeks in any year were the same, and one simply could not take a sample
from a short period, as Ms. Morand did, to determine the pub's alcoholic
beverage sales. With respect to the 200% markup that Ms. Morand applied to
purchases in order to determine the dollar amount of food sales, Mr. Légaré
said that he would have loved for his business to have made that much profit,
but that it didn't.
[87] Michel Légaré also
explained that there were four or five other people with Ms. Morand at the
meeting at which she gave him and Mr. Richard the draft assessment. Mr. Légaré
said that since he considered the government's numbers completely unrealistic
to say the least, he even offered the officials the keys to the business,
telling them that they would undoubtedly run his business better than he could,
because he had never seen amounts of that kind.
[88] Since the officials
reacted by asking him to show that the amounts that Ms. Morand arrived at were
inaccurate, Mr. Légaré therefore contacted Alberto Pizzi, a gentleman to
whom an acquaintance had referred him. Although Mr. Pizzi claimed to know
people at the Ministère du Revenu du Québec, and had promised to sort things
out with them, he did not actually undertake any efforts in that regard, and he
agreed to write a letter acknowledging this, without, however, reimbursing the
fees that he had obtained from the Appellant (Exhibit A‑25).
[89] Michel Légaré said
that he cooperated with Ms. Morand throughout her audit, that he was
available to answer questions, that all the documents were available, and that
the government had, in fact, seized 36 boxes in the course of the search and
seizure of April 12, 2000.
[90] Michel Légaré also
explained that gross profit margins remained constant throughout the years
covered by the audit and for some time thereafter, but that everything was
better controlled now, meal bills were more detailed, deposits were better
documented and expenses paid in cash were correctly entered. He also stated
that the Appellant no longer used a computer system and that all bills were filled
out manually.
[91] As for the cash
purchases from the SAQ during the years covered by the audit, Michel Légaré
essentially repeated the explanations provided by his father Raymond Légaré
regarding the obligation to pay cash for part of the purchases, especially
during the first years, due to the limits that the SAQ imposed on payments made
by cheque.
[92] Michel Légaré also
testified about his lifestyle from 1994 to 1999. He said that he acquired a
residence in Rosemère for $165,000, which was financed with a $150,000 hypothec.
He said that he owned a Pontiac Firebird, which he sold in 1998, and that
he leased a Porsche Boxster for $800 a month after that.
[93] On cross-examination,
Michel Légaré once again explained the method for controlling alcoholic
beverage sales, the use of the meters and the reports that employees had to
fill out, and he offered a sample of such a report (Exhibit A‑26).
[94] He explained that
food orders were sent to the kitchen through the Squirrel system. The menu
information was entered in the computer; each member of the wait staff had an
access card and ordered the dishes by entering the appropriate codes. The
computer generated an individual bill for each customer throughout the day,
and, at the end of their shift, each of the waiters could obtain the total that
they had sold. However, according to Mr. Légaré, the computer shut itself down
automatically every 24 hours during the night. After that point, it was
impossible to obtain the previous day's individual bills, and only summaries
were available. Mr. Légaré claimed that the Squirrel system was
purchased for $34,000, and that the seller, one Mr. Goulet, said that the
system was government-approved. When Ms. Morand asked him for
individual meal bills, Mr. Légaré contacted Mr. Goulet and he
confirmed that it was not possible to obtain a copy of the individual bills for
a day that was finished. After that, Mr. Légaré supposedly asked
Mr. Goulet to contact Ms. Morand in order to explain the situation to
her.
[95] According to
Michel Légaré, the computer was also used once a week to enter the
compilations of alcoholic beverages, by category, sold during the week,
compilations that he or his father did on a daily basis using the reports submitted
by the employees. These daily compilations were entered in a book, and an
employee was responsible for entering the data in the computer once a week.
[96] Mr. Légaré was
cross-examined about the thefts by employees, to which he referred in his
testimony. He specified that those thefts occurred a few years ago, not during
the period covered by the audit.
[97] As far as his
lifestyle is concerned, Mr. Légaré said that his annual salary was
roughly $27,000 from 1994 to 1999, and that it increased during the last
year. He also said that he has won lottery prizes twice, but did not specify
the amounts. After selling the Pontiac Firebird, he supposedly advanced $17,000
to the Appellant. He then rented a Cadillac STS for $800 per month in 1997 and
1998, and then leased the Porsche Boxster for the same amount in 1998. He
specified that he took dividends of $800 per month to pay for the lease of that
car. As one can see, this version is somewhat different from the account that
he gave during his testimony‑in‑chief. Lastly, he said that he had
a credit card under the Appellant's name for his gas purchases. As for his
grocery purchases, he said that they were low, because he was always at the pub
and ate his meals there.
[98] The Appellant called
Marc Bélanger as an expert witness. Mr. Bélanger has been a Quebec
chartered accountant since 1983. He has been a partner with the firm of Dallaire Forest Kirouac
since 1992. In 2004, he obtained a graduate diploma in forensic accounting from
Montréal's École des hautes études commerciales (Exhibit A‑27).
[99] Although Mr. Bélanger
has served as an expert before courts in various types of matters, including
breaches of contract, he has never been an expert in an excise tax case.
However, he said that he has relevant experience in the restaurant industry
because he has had some restaurants and bars in the Québec area as clients and
has represented them in tax investigations or audits. In fact,
Mr. Bélanger said that his expertise was developed in relation to the
operations of these types of establishments and what he called their
"cultural" characteristics.
[100] Mr. Bélanger's
report, dated December 12, 2003, was offered in evidence (Exhibit A‑28).
Mr. Bélanger did an initial analysis of the situation involving the
assessment in issue, a Québec sales tax assessment, and some income tax
assessments. Other assessments had been made in respect of appropriations of
funds by Raymond and Michel Légaré, the two shareholders.
[101] I must note from the
outset that the calculations that Mr. Bélanger made throughout his report
cover only four full fiscal years, that is to say, from May 1, 1994,
to April 30, 1998, while the period covered by Ms. Morand's
audit also encompasses the nine‑month period from May 1, 1998,
to January 31, 1999.
[102] For the purposes of
his analysis, Mr. Bélanger consulted, among other things, the documents seized
in April 2000 and the report prepared by Ms. Morand. The first thing
that he observed was an accounting "delinquency" problem, because the
deposits exceeded the reported sales during the various periods, and this
resulted in the taxes accumulating period after period. Although adjusting
entries were made at the end of each year and the amounts of taxes due appeared
on the financial statements prepared by the accountant Mr. Richard, the
fact does remain that the problem was never rectified. The total GST due
amounted to $79,000 for the entire period covered by the audit, an amount
which, as stated above (Exhibit A‑28, at page 7), the Appellant
has admitted to.
[103] In addition to a
problem with accounting entries of source documents, Mr. Bélanger identified
what he called a [TRANSLATION] "lack of rigour" with respect to
the creation of source documents themselves. For example, there were identical alcoholic
beverage sales reports for two different days. In addition, $130,840 in
purchases from the SAQ were made in cash, and these purchases were never
entered in the books (Exhibit A‑28, at page 2). These problems
were, in fact, noted by Ms. Morand early on in her audit.
[104] Mr. Bélanger also
found that certain entries, such as lottery earnings by Raymond Légaré, were
treated as though they had been reinvested in the business, when they actually
consisted of $149,563 in sales that were not entered in the books and were therefore
not reported. The objection officer determined, in respect of the assessment
for appropriation of funds, that the amount of these sales was $151,975. Given
the small difference, Mr. Bélanger at the end of the day accepted the
latter number in his report (Exhibit A‑28, at pages 3 and 4).
[105] In his initial
analysis of Michel Légaré's lifestyle, Mr. Bélanger determined that the
sum of $240,000 was appropriated in the course of the years 1995 through 1998 ($60,000 x 4).
Mr. Bélanger's report states, without going into any detail, that since Mr. Gratton,
the Appellant's new accountant, had done a more thorough analysis of this
question, he was reducing this amount to only $24,599 in view of the fact,
among other things, that Michel Légaré ate all his meals at the pub. According
to Mr. Bélanger, this reduction also corrected an initial error that he had
made when he determined that Michel Légaré had paid for the lease of his
vehicle personally, when, in fact, it was the Appellant that had paid for the
lease (Exhibit A‑28, at page 4). I must say that these
explanations, which are quite cursory given the circumstances, leave me puzzled
because there is no analysis substantiating the amounts determined. Moreover,
Mr. Bélanger's finding regarding the automobile lease contradicts Michel Légaré's
testimony.
[106] According to Mr. Bélanger,
in businesses such as the Appellant's, certain employees [TRANSLATION]
"insist on being paid in cash". Among others, doormen and other
people assigned to security fall under this category. Mr. Bélanger found
that the Appellant's books made no reference to payments to such employees.
While he initially determined that these payments amounted to $1,000 a week and
actually came from undeposited and unreported sales, he later reduced this
amount to $300 per week based on Mr. Légaré and Mr. Gratton's
assertion that the $1,000 per week received by these people came primarily from
the sharing of tips received by the wait staff (Exhibit A‑28, at pages 4
and 5). Thus, Mr. Bélanger estimated that $62,400 ($300 x 52 weeks x
4 years) worth of wages were paid in cash. Once again, Mr. Bélanger's
estimates omit the nine‑month period from May 1, 1998 to
January 31, 1999.
[107] Lastly, Mr. Bélanger
showed that the weighted gross profit from the Appellant's operations during
the period covered by the audit was 50-51%. At pages 5 and 6 of his
report, he explains how he reached this result:
[TRANSLATION]
Assumptions regarding the
percentage of gross profit
Lastly, the assumption
regarding the percentage of gross profit is the key to this entire matter.
In our initial report, we used the
following weighted gross profit percentages:
|
|
Financial statements
%
|
DFK
%
|
Revenu
Québec
%
|
|
1995
|
52.9
|
55.9
|
64.1
|
|
1996
|
47.7
|
52.6
|
66.5
|
|
1997
|
48.9
|
53.4
|
62.9
|
|
1998
|
49.5
|
53.9
|
65.7
|
The Revenu Québec representatives assumed that the unreported sales
for the period covered by the audit amounted to $3,006,967. This finding was
incomplete because Revenu Québec never determined how these funds were used.
In the absence of reliable numbers, considering that Revenu Québec's
detailed analysis yields improbable and unreasonable results, we made another
analysis applying an average gross profit percentage to the only audited figure
that the parties agree upon: the total amount of purchases.
Total purchases are as follows:
|
|
Revenu Québec reference
|
Purchases
reported in the books
$
|
SAQ
discrepancy
$
|
Total
$
|
|
1995
|
(ref. 6,40)
|
693,374
|
61,979
|
755,353
|
|
1996
|
(ref. 6,35)
|
776,319
|
63,873
|
840,192
|
|
1997
|
(ref. 6,28)
|
841,336
|
712
|
842,048
|
|
1998
|
(ref. 6,21)
|
891,783
|
4,276
|
896,059
|
|
|
|
3,202,812
|
130,840
|
3,333,652
|
The breakdown of sales entered in the books is as
follows:
|
|
$
|
|
1995
|
1,470,336
|
|
1996
|
1,483,339
|
|
1997
|
1,644,974
|
|
1998
|
1,767,163
|
|
|
6,365,812
|
Subsequently, from 2000 to 2002, the company's gross profits were 47.6 %
in 1999, 50.7% in 2000, 49.4% in 2001 and 52% in 2002. During this period, we
believe that the presence of a new manager, the introduction of appropriate
controls and the supervision of accounting entries by Mario Gratton improved
the company's performance.
Based on this information, we believe that the weighted
gross profit margin for the period covered by the audit is in the 49–51%
range. Thus, the use of the funds from unreported sales would be reconciled as
follows:
|
|
49%
|
50%
|
51%
|
|
Sales, extrapolated from total purchases of $3,333,652
|
$6,536,573
|
$6,667,304
|
$6,803,371
|
|
Sales as
reported in the books
|
$6,365,812
|
$6,365,812
|
$6,365,812
|
|
Unreported
sales
|
$170,761
|
$301,492
|
$437,559
|
|
Use of funds
|
|
|
Advances to
directors
|
$151,975
|
|
SAQ cash purchases
|
$130,840
|
|
GST – QST on
cash purchases
|
$19,659
|
|
Withdrawals by
Michel Légaré
|
$24,599
|
|
Expenses paid
in cash
|
$62,400
|
|
|
$389,473
|
|
|
|
Since the use of funds points to $389,473 in unreported sales, the
weighted gross profit ranges from 50 to 51%, an average equal to the results
obtained for the years 2000 to 2002.
[108] Mr. Bélanger emphasized
that his findings on the percentage of gross profit were only a few percentage
points apart from those of the accountant Mario Gratton (Exhibit A‑14).
According to Mr. Bélanger, the unreported sales amounted to $389,473, not
$3.3 million as the Ministère du Revenu du Québec was alleging. Thus,
since the assets and personal expenses of the two shareholders showed no trace
of these $3.3 million in supposedly unreported sales, no such sales beyond the
amount of $389,473 were made.
[109] Mr. Bélanger acknowledged
that there is a [TRANSLATION]
"mathematical rigour" to Ms. Morand's method for determining the
dollar amount of alcoholic beverage sales. However, he said that it was
difficult for him to determine whether the few weeks sampled were representative
of the entire period covered by the audit, but that, at the end of the day, one
had to [TRANSLATION] "close the loop", i.e. find a trace of the supposedly
unreported amounts, which Ms. Morand neglected to do.
[110] Since Mr. Bélanger's
expert report did not explicitly bear on Ms. Morand's sampling, her use or
non-use of the Squirrel system data, or the reliability of those data,
I had to limit the questioning by counsel for the Appellant on these
points.
[111] Mr. Bélanger also
referred to a decision made by an objections officer named Mr. Fontaine, a
decision which he called [TRANSLATION] "ambivalent". After Mr. Bélanger
submitted his representations, Mr. Fontaine reduced the appropriations of funds
by the directors from $2,910,021 to $391,975, but maintained the initial assessments
for consumption taxes on unreported sales of more than $3 million as well as
the income tax assessments on this additional income imputed to the Appellant.
[112] Mr. Bélanger explained
that the distinguishing characteristic of this matter was precisely that the Ministère
du Revenu du Québec found no trace of the amounts in question, which made this
situation the opposite of the usual scenario, where observations regarding a
person's assets and lifestyle lead to the conclusion that the additional funds
could only have come from the business's unreported sales. Mr. Bélanger
said that regardless of the method followed in the case at bar, one had to find
a trace of the amounts that one claims to be unreported sales, and that
Ms. Morand's findings on the subject were not sufficiently substantiated
and therefore remain somewhat "exotic".
The Appellant's submissions
[113] Counsel for the
Appellant began by emphasizing that the Appellant's business is located close
to a college in a Montréal suburb. It is a pub, which is not a high-end
restaurant, but rather, a high‑volume business that uses many promotions to
attract customers. Hence, counsel submits that that the general standards of
the industry cannot be applied to determine the dollar amounts of its sales.
[114] Counsel for the
Appellant noted that the only offence for which the Appellant was charged following
the seizure of dozens of boxes of documents, and the retention thereof for more
than two and a half years, pertained to GST in the amount of $61,946.59 that
was already entered in the books but was not reported. In fact, this charge was
dropped due to a lack of evidence of dishonest intent.
[115] With respect to the
information in the Squirrel system, counsel for the Appellant submitted that
all the daily reports in the nature of Exhibit I‑19 were available
to Ms. Morand, but that she rejected them on the pretext that they did not
provide information about the individual transactions but simply stated the
totals by general category. He said that it was never proven that the general
data from the system were wrong, even though the Ministère du Revenu du Québec had
suspicions about them, suspicions that Ms. Morand has always refused to
admit to. Thus, if the general data from the system are valid, counsel for
the Appellant submits that they cannot be rejected on the pretext that
Ms. Morand could not be given the data concerning the individual
transactions.
[116] Counsel for the
Appellant also noted that the Appellant's gross profit margins after correction
of the erroneous accounting entries were constant during the period covered by
the audit, and remained stable in the 49-52% range over the subsequent years,
whereas Ms. Morand's calculations suggested that the gross profit margin
was even as high as 67%, a difference of 16 or 17%. In his view, such results
are totally illogical and are due, among other things, to a 200% markup on food
purchases that is not supported by any technical document.
[117] On the basis of the
findings of the expert Marc Bélanger, the Appellant's counsel submitted that
even though Ms. Morand calculated that there had been $3.3 million in
unreported sales, she was never able to show where that money went, and she even
said that she was under no obligation to do so, even though the amounts considered
to have been appropriated by the two shareholders had been reduced from $2.9
million to $391,975 at the objection stage.
[118] Counsel for the
Appellant submitted that the Squirrel system was used for both alcoholic
beverage sales and food sales, that all the transactions were entered in the
system, and that although the individual bills were not kept, the printouts
from that system were sent to the accountant. He therefore cast doubt on the
work done by Ms. Morand, who used a sample consisting of 14 days over a
four-year period to establish the sales of alcoholic beverages. He said that
these results are open to challenge as well, because Mr. Légaré told him
that he sold beer for $0.99 for days on end, whereas Ms. Morand determined
that beer was always sold for $1.89 plus tax, which comes out to approximately
$2.25 or $2.30 including tax. According to the Appellant's counsel, it has been
proven that one‑half the volume of the beer was sold for $1 per glass
(bock). As for the food, he submitted that the Appellant clearly did not make
money off the "top sellers" such as chicken wings, pizza, spaghetti or
hot dogs and that a 200% markup on the purchases of such foods makes no sense.
[119] Counsel for the
Appellant submits that the financial statements reflected its true position. He
discussed the admissions regarding the amounts of GST payable, and argued that
they were the result of a certain amount of negligence or bungling by the
accountant. However, he said that the allegation that $3.3 million in sales
were not reported [TRANSLATION] "is totally beyond reason."
[120] Counsel for the
Appellant submits that the Appellant, through the testimony of Marc Bélanger
and computer printouts, has adduced prima facie evidence refuting
the Minister's assumptions. Thus, in his submission, the onus was on the
Minister to prove his assumptions. Since no expert was called forward to
establish that a 14-day sample was valid for alcoholic beverage sales and that
a 200% markup on food purchases was appropriate, he argued that the
Respondent's position cannot succeed.
[121] Counsel for the
Appellant also emphasized that there was no proof that the documents generated
by the Squirrel system were inaccurate or tampered with, or that any
"zapping" took place. He also argued that while the courts have
recognized that an audit by survey or sampling can be valid in and of itself,
one must first show that the surveying and sampling was reliable and
sufficient. Now, a sample of 14 days over four years, and a 200% markup on
purchases for the entire period even though the Appellant's business
experiences seasonal fluctuations, were not sufficient in his view, especially
since the total sales amounts recorded in the Squirrel system were available.
Counsel also emphasized that while the accounting system was far from perfect insofar
as the charging of amounts to different items or headings was concerned, the
total sales numbers were consistent, and this could have been confirmed by the
data from subsequent years.
[122] Counsel for the
Appellant therefore submitted that Ms. Morand's findings were based solely
on conjecture, estimates and very subjective choices. Marc Bélanger, Mario Gratton
and even Robert Richard said that the Appellant cannot possibly have
failed to report $3.3 million in sales during the period covered by the audit.
[123] Counsel for the
Appellant referred to the decisions in the following cases in support of his
arguments:
- Gestion Cheers Inc. v.
Canada, [2001] T.C.J. No. 179 (QL);
- Garage
Pierre Allard Inc. c. Québec (Sous-ministre du Revenu), [1995] R.D.F.Q.
36 (C.A.);
- Huyen v. R., [1997] G.S.T.C. 37, at
page 37-4 (T.C.C.);
- Giannoukakis c. Québec (Sous-ministre du
Revenu), [1995] R.D.F.Q. 34;
- Restaurant
Brossard Inc. c. Québec (Sous-ministre du Revenu), [1993] R.D.F.Q. 137
(C.Q.).
The Respondent's position
[124] First of all, counsel
for the Respondent noted that the Appellant did not keep the relevant documents
in respect of food sales, that is to say, the invoices themselves. He
emphasized that, despite her requests, Ms. Morand was only able to obtain
daily summaries for 26 days in August 1996 (Exhibit I‑19)
and that if such documents existed for other periods, they were not submitted,
or, at any rate, the Appellant did not prove that they were submitted because
no document of the kind was adduced in evidence. According to counsel for the
Respondent, the 26 days' worth of summaries were not, in any event, the
ones being sought by Ms. Morand, who was trying to ascertain the selling
price of the various food items in order to determine the average gross profit
margin. Now, the summaries did not specify the items sold, the quantity of each
item sold, and the price for which it was sold. For example, the invoices
would have made it possible to determine the exact price of a spaghetti dish,
and whether the price varied according to the time of day and the day of the
week. In addition, and quite unlike the summaries, the invoices would have made
it possible to ascertain how many spaghetti dishes were sold for each of the
different prices.
[125] According to counsel
for the Respondent, the Appellant most certainly voiced its disagreement with
the 200% markup that Ms. Morand used to determine the dollar value of the food
sales. In addition, Michel Légaré spoke at length about the numerous
promotions and discounts, alleging that he did not make much of a profit, that
he even lost money on certain items based on the discounted prices printed on
the menu place mat, and that he also lost money on the activities of the week
or the themed events (Exhibits A‑22, A‑23 and A‑24). However,
counsel submits that no evidence was adduced and no document was offered to establish
the cost price of the various items offered at discounted prices, or the quantities
sold at those prices. Thus, to come back to the example of a spaghetti
dish, he submitted that if the Appellant actually did sell the dish for $1, only
the invoices would have made it possible to determine how many spaghetti dishes
the Appellant sold for that price, as well as the difference between that price
and the normal price, and only evidence as to cost price would have made it
possible to determine the gross profit margin on the dish. However, in the
submission of counsel for the Respondent, there is absolutely no documentary
evidence on the basis of which the average selling prices or the cost prices of
the dishes sold at a discount can be determined. Furthermore, it is impossible,
in the absence of details regarding the sales, to determine the ratio of reduced‑price
sales to regular‑price sales. In other words, he submits that it is
impossible to determine the volume of the sales of what Michel Légaré called
"top sellers", such as pizza, spaghetti, chicken wings, hot dogs
and so forth, in relation to the other sales.
[126] With respect to
alcoholic beverage sales, counsel for the Respondent noted that all the employees'
daily reports, which Ms. Morand first asked Mr. Légaré to keep in
October 1998, were destroyed. Despite Ms. Morand's request, Raymond Légaré
continued to destroy them. Thus, at the end of the day Ms. Morand was only
able to obtain these reports for the period from November 7, 1998, to
January 31, 1999, which is just short of three months in duration. In
this regard, and given the volume of the audit work involved, Ms. Morand compiled
all the data from the daily reports for 14 days spread out over that period,
making sure to use the same day of the week twice in order to account for
promotions, discounts, themed events, etc. Indeed, this enabled her to determine
the average selling prices for beer (for example, beer by the bottle, by the
glass or bock, by the pitcher and by the half-pitcher), the percentage of sales
that each category accounted for, and the average markup percentages on wine
and liquor sales. The results of this compilation were then applied to the
actual purchases for each year in order to reconstruct the sales. Counsel for
the Respondent emphasized that the Appellant did not contest Ms. Morand's
sampling and that even its expert witness, Marc Bélanger, found that there
was a [TRANSLATION] "mathematical rigour" to the method that Ms. Morand
used, though he challenged the results. Thus, counsel for the Respondent
submits that no evidence has been adduced to suggest that the sampling was
inadequate or unreliable.
[127] According to counsel
for the Respondent, Ms. Morand had to do an audit in which the Appellant
had no meal bills, its employees' daily reports on alcoholic beverage sales
were systematically destroyed or thrown out, and its accounting was patently
deficient, notably because purchases from the SAQ were not entered in the books;
thus, Ms. Morand had to use indirect audit methods.
[128] Counsel for the
Respondent submitted that the onus was on the Appellant to show that the
assessment was erroneous and provide positive evidence that the assumptions on
which the assessment was based were inaccurate, because the assessment is
presumed valid and this presumption of validity includes a presumption that all
the assumptions on which the Minister based the assessment are valid.
[129] Counsel for the
Respondent did not see the relevance of the questions concerning the penal
prosecution and the assessments concerning the appropriations of money by the
two shareholders. He also rejected the principle of "communicating
vessels" pleaded by Marc Bélanger and adopted by counsel for the Appellant.
Essentially, as far as counsel for the Respondent is concerned, the only issue
is to determine the amount of the Appellant's taxable sales and the amount of
applicable GST. In this regard, he argued that it was not Ms. Morand's
obligation find out where the money went or to determine how much the
shareholders personally appropriated.
[130] Counsel for the
Respondent acknowledged that the assessment did not necessarily reflect
reality, but he said that there was no way to ascertain the true picture because
the Appellant's situation forced the tax authorities to use indirect assessment
methods the results of which must be accepted since nothing better is
available. As far as those results are concerned, counsel for the Respondent
said that the Appellant was the author of its own misfortune. In particular, he
noted that the 200% markup, less 5% for losses, applied by Ms. Morand to
determine the dollar value of food sales, yielded results that were close to
the amount that the Appellant reported for the last period, that is to say,
from May 1, 1998, to January 31, 1999, since the difference
was only approximately $18,000. Thus, in his submission, if the method employed
yielded valid results for this period, the results for the other periods should
be valid as well.
[131] Counsel for the
Respondent emphasized that, in addition to the fact that the Appellant's
accounting was negligent, the documents prepared by Raymond Légaré yielded
evidence of gross negligence. For example, Exhibits A‑3 and A‑4
are weekly reports that stated exactly the same amounts for the sales of
several categories of drinks for two different periods; this clearly does not
reflect reality, as Marc Bélanger, the Appellant's expert, even acknowledges.
Other reports (Exhibit I‑28, at pages 35 to 38) stated
identical $2,000 cover charge revenues for several one-week periods, while
other documents indicate cover charge revenues of $2,880 and $2,790 for certain
days (Exhibit I‑11, at pages 7.162 and 7.164). For certain
weeks, the weekly reports filled out by Raymond Légaré indicate no cover
charge revenue (Exhibit I‑28, at pages 31 to 34). All of this
shows that the reports did not reflect reality and that some income was
intentionally not reported.
[132] Counsel for the
Respondent submits that the fact that the daily reports from employees assigned
to the sale of alcoholic beverages were not kept, even during a one-month
period following a request for such retention in October 1998, is also a
factor to consider in evaluating the Appellant's liability.
[133] Furthermore, counsel
for the Respondent noted that the GST amounts reported and remitted were always
lower than the amounts due, that they grew with every passing year and that
nothing was done to correct the situation despite that fact that the
accountant, Mr. Richard, had notified Raymond Légaré of this. Not all
the purchases made in cash at the SAQ were entered up in the books either, and
the result was that the accounting documents did not reflect reality.
[134] With respect to the
Squirrel system food sales reports, counsel for the Respondent noted that the
bills were not kept even though they were printed out throughout the day. Since
the only thing that could be produced after a day ended was a summary, he
submits that the Appellant did not comply with section 286 of the Act, that
provides for the keeping of appropriate records.
[135] The Respondent
referred to the following cases, among others, in support of his submissions:
Garage
Pierre Allard Inc. c. Sous-ministre du Revenu du Québec, [1995] R.D.F.Q.
36 (C.A.);
9001‑9159
Québec Inc. v. Canada, [2002] T.C.J. No. 49 (QL), [2002] G.S.T.C. 14;
Ouaknine
v. Canada (Attorney General), [2001] T.C.J. No. 720 (QL), [2001] G.S.T.C. 130;
Ouaknine
v. Canada (Attorney General), [2003] F.C.J. No. 535 (QL), [2003]
G.S.T.C. 65 (C.A.);
2868-2656
Québec Inc v. Canada, [2003] T.C.J. No. 291 (QL); [2003] G.S.T.C.
98;
2868-2656 Québec Inc v.
Canada, [2004] F.C.J. No. 1979 (QL), [2005] G.S.T.C. 156;
9036‑9695
Québec Inc v. Canada, [2004] T.C.J. No. 252 (QL), [2004] G.S.T.C. 66;
Bordeleau
v. Canada, [2003] T.C.J. No. 208 (QL), [2003] G.S.T.C. 73;
Old
Western Pizza Inc. v. Her Majesty the Queen, 2004 TCC 452; [2004] T.C.J.
No. 326 (QL), [2004] G.S.T.C. 83;
Entrepreneur
Peintre J.L. Inc. v. Canada, [1999] T.C.J. No. 253 (QL), [1999] G.S.T.C. 60,
at page 60-5;
9028-7103
Québec inc. c. Sous-ministre du Revenu du Québec, [2004] Q.J. No. 463
(QL) (C.Q.);
Sous-ministre
du Revenu du Québec c. Dupuis, [1996] R.D.F.Q. 70 (C.A.);
St-Martin
c. Québec (Sous-ministre du Revenu), [2003] R.D.F.Q. 123, [2002] Q.J. No. 9325
(QL) (C.Q.);
Pétroles
Irving inc. c. Sous-ministre du Revenu du Québec, [2003] R.D.F.Q. 151;
[2003] Q.J. No. 154 (QL) (C.Q.);
Pétroles
Irving inc. c. Sous-ministre du Revenu du Québec, [2004] Q.J. No. 6726
(QL) (C.A.);
Daw c.
Québec (Sous-ministre du Revenu), [2005] R.D.F.Q. 352; [2004] Q.J.
No. 12885 (QL) (C.Q.).
Analysis
[136] I would begin by
pointing out that the Appellant acknowledged that an amount of $79,604.44 in
net tax was collected but not remitted during the period from
May 1, 1994, to January 31, 1999. This amount consists of
GST that was collected according to the Appellant's accounting records and
financial statements, but was neither reported to the government nor remitted
during that period, less the additional ITCs that were allowed during the audit
in respect of purchases from the SAQ that were paid for in cash and were not
entered in the accounting records.
[137] This first point
reveals two things. The Appellant's admission and the testimony of the
accountant Mr. Richard show that although the accountant notified Raymond Légaré
that the tax that was collected was not being reported and remitted in full and
that the discrepancy was getting larger every year, nothing was done to correct
the situation. Moreover, the purchases from the SAQ that were paid for in cash
were never entered in the books, and this was only discovered by the auditor, Ms. Morand.
If one wishes to ascribe blame for "errors" or "bungling"
to an accountant, one has at least to act on his notifications and give him all
the necessary figures, along with the relevant documents, so that he can perform
his task correctly; this was not done in the instant case. I will come back to
the documents submitted to Mr. Richard in connection with the Appellant's sales.
[138] The Appellant's
expert Marc Bélanger admitted that, apart from the unreported and unremitted
GST, the Appellant owed an additional $14,542 in GST on unreported sales that
he estimated at $389,473 (Exhibit A‑28, at pages 6 and 7). This
amount of $14,542 consists of net tax, that is to say, tax minus certain ITCs.
[139] According to Mr. Bélanger's
expert report and testimony, the Appellant's taxable sales were not fully
entered in its books. This contradicts the testimony of the accountants Mr.
Richard and Mr. Gratton, who said that all the sales had been accounted
for and that, ultimately, the problem involved [TRANSLATION] "incorrect
charging" to various headings and line items. In fact, Mr. Bélanger was
very much correct when he noted that the sales summaries filled out by Raymond Légaré
and submitted to Mr. Richard indicated the same numbers for several
categories of alcoholic beverage sold during different periods, which clearly
did not reflect reality.
[140] At the request of
counsel for the Appellant company, Raymond Légaré himself, perhaps
inadvertently, perhaps not, offered Exhibits A‑3 and A‑4,
which he had filled out, and which purport to be weekly alcoholic beverage
sales summaries. A reading of these documents clearly discloses that there
is no way that they could reflect the true picture. Yet Mr. Richard said that
this was the type of document that he was given for the purpose of recording
sales of alcoholic beverages.
[141] Mr. Bélanger also
acknowledged that certain expenses, including the wages of doormen or security
employees, were paid in cash and were not entered in the Appellant's books.
Although he initially estimated these payments at $1,000 per week, he later
reduced them to $300 per week because, according to Raymond Légaré and the
accountant Mr. Gratton, the cash payments to these employees came
primarily from the sharing of tips received by the other employees. However, no
evidence was adduced in this regard, and neither Mr. Légaré nor Mr. Gratton
even addressed this question.
[142] In addition, in
Marc Bélanger's expert opinion, Raymond Légaré's lottery earnings,
which were entered in the Appellant's books as though they had been reinvested
in the business, were actually $149,563 in sales that were not entered in the
books and were therefore not reported. Having accepted the tax
authorities' calculations in this regard, he determined that the total was
$151,975.
[143] Mr. Bélanger's
initial analysis determined that Michel Légaré appropriated $240,000 from 1995 to
1998. Mr. Bélanger did not take the period from May 1, 1998, to
January 31, 1999, into account. This large amount was reduced to only
$24,599 by Mr. Bélanger for the purposes of the instant case. In
order to explain this major change, Mr. Bélanger cited an error concerning the
payment of Michel Légaré's personal automobile lease, which was supposedly
entered into by the Appellant, not by Mr. Légaré himself, and the fact
that Mr. Légaré ate all his meals at the pub because he was always there. First
of all, the explanations about the payment of the lease expenses contradict the
testimony given by Michel Légaré, who said that he personally paid the
$800 monthly lease expense using dividends that the Appellant paid him.
Secondly, not even a minimal analysis of Michel Légaré's lifestyle was
adduced in evidence by Mr. Bélanger or anyone else.
[144] The point of all
this is that while Mr. Bélanger estimated that the Appellant's additional
unreported sales amounted to $389,473, his explanations regarding the way in
which he arrived at this amount are not supported by any serious analysis or by
any document or any testimony. In my opinion, Mr. Bélanger's expert report
and his testimony served only to establish two things: firstly, and contrary to
what the accountants Mr. Richard and Mr. Gratton, and Raymond and
Michel Légaré said, not all taxable sales were entered in the books; and
secondly, the true problem did not consist of erroneous accounting charges,
but, rather, the falsification of documents submitted to the accountant. Given
these findings, all the gross profit margin calculations that were done by the
accountant Mr. Gratton based on entries made by the accountant Mr. Richard
and by Mr. Bélanger himself, and that yielded margins characterized as
reasonable, normal and constant, lose much of their meaning, in my opinion. I
find that the exercise was an attempt to achieve results favourable to the
Appellant using numbers that were partially false to begin with. Even the
accountant Mr. Richard said that the bank deposits exceeded the sales
entered up in the books and that he had to make year‑end adjusting
entries in order to account for the discrepancies.
[145] This brings me to
the documents offered by the Appellant, the documents that it kept, the
documents used for its accounting and the documents discovered by Ms. Morand
during her audit.
[146] It has been determined
that no bills were drawn up with respect to alcoholic beverage sales. The
employees tracked sales by manually counting the bottled beer sales and by
reading special meters for draft beer, wine on tap, and spirits.
The employees assigned to beverage sales had to submit one or more reports
at the end of each work shift or when the prices changed. The person who
primarily tracked these reports was Raymond Légaré, who also compiled
them. Once this operation was complete, the employees' reports were
destroyed or thrown out. Although Raymond Légaré stated that a daily
compilation was made and then submitted to the accountant once a month, the
documents offered in evidence are weekly summaries (Exhibits A‑3 and
A‑4, and Exhibit I‑28, at pages 31 to 38). Mr. Richard said
that Exhibits A‑3 and A‑4 are representative of the type of
document that he was given in order to do his accounting work. In addition,
Michel Légaré said that the daily compilations of alcoholic beverage sales
were entered in a book and that an employee then entered the data into the
Squirrel system once a week. However, it can be seen that the 26 daily Squirrel
reports offered in evidence during Ms. Morand's testimony give a summary
of alcoholic beverage sales by general category (Exhibit I‑19). In
view of these multiple versions, it is difficult to ascertain what documents
were actually used for accounting purposes.
[147] During her audit, Ms. Morand
found that the weekly compilations made by Raymond Légaré (e.g. Exhibits A‑3
and A‑4) were patently false. While Exhibits A‑3 and A‑4
state identical sales totals over two different one‑week periods for
several categories of alcoholic beverage, other documents report sales totals
in round numbers ($1,500, $2,000, $2,500 and $3,500), which makes them hardly
plausible (Exhibit I‑28, at pages 35 to 38).
[148] Ms. Morand discovered
more documents that refer to cash payments, including in respect of wages,
which had clearly not been accounted for, or for which the entry in the
Appellant's books could not be verified (Exhibits I‑11 and I‑13).
This fact was actually noted by Marc Bélanger, the Appellant's expert, who
made his own estimate of these payments, an estimate that was not based on a
single document, but rather, on the assertions allegedly made by Raymond Légaré,
and by the accountant Mr. Gratton, who, it should be added, was not the
Appellant's accountant at the relevant time. Neither of these two people
testified on this point, and no evidence was offered with respect to it.
[149] As far as cover
charges are concerned, we know that the weekly alcoholic beverage summaries
prepared by Raymond Légaré occasionally refer to them, in which case
they always state identical amounts of $2,000 per week, whereas others make no
reference to cover charges at all (Exhibit I‑28, at pages 31 to
38). Ms. Morand discovered documents stating that cover charge revenues
amounted to $2,880 and $2,790 on certain days (Exhibit I‑11, at pages
7.162 and 7.164). Despite the claims by counsel for the Appellant that the
daily Squirrel summaries included all revenues, there is no reference to cover
charges on the 26 daily summaries from August 1996 that Ms. Morand managed
to obtain (Exhibit I‑19).
[150] As far as food sales
are concerned, the Appellant did not keep any bills, and none were offered in
evidence. Despite her requests for Squirrel system printouts providing the
details of all transactions for two ten-day periods chosen at random from two
different fiscal years, Ms. Morand claims that she only obtained the
summaries referred to above for a period of 26 days in August 1996 (Exhibit I‑19).
Raymond and Michel Légaré testified that documents of this nature existed
and had been submitted to Ms. Morand in boxes of documents that were
brought to her during the audit that she commenced on Mr. Richard's
premises in November 1998. No other such summary was offered in evidence. Of
course, there was the search and seizure of April 12, 2000, the day after the
assessment under appeal. However, the seized documents were given back at some
point, and Marc Bélanger, the Appellant's expert, claims to have consulted
them while they were still under seizure. Nothing in his report or his
testimony addresses this, however.
[151] In view of the total
absence of documents through which the details of the Appellant's sales could
be verified, and after issuing two warnings and a requirement letter, Ms. Morand
managed to obtain the employees' daily reports concerning the sales of
alcoholic beverages. Having extended her audit period from
October 31, 1998 to January 31, 1999, she finally obtained
these reports for a period just shorter than three months in duration, namely
from November 7, 1998, to January 31, 1999. She selected 14
days from this entire period, ensuring that she took a different day for each
week, and the same day of the week twice. Thus, she compiled data from
some 146 employee reports in respect of the 14 days in order to determine
exactly what was sold and at what price. She also calculated the
percentages that draft beer, that is to say, beer by the glass (bock), pitcher
and half-pitcher, accounted for. The same exercise was done for wine and spirits
in order to determine an average selling price, and thus, an average markup,
for each product and each form of that product sold, so that the different
prices for a given product or form of product could be taken into account on
the basis of the many promotions offered by the Appellant. All in all, this was
work of exemplary rigour and attention to detail. In the next step, with a view
to reconstructing the alcoholic beverage sales for the entire period covered by
the audit (that is to say, from May 1, 1994, to
January 31, 1999) Ms. Morand transposed the data thereby
obtained to the purchases for each year or part thereof within the period
covered by the audit (the purchase data having first been corrected), adjusting
the numbers from each year to account for inflation.
[152] Naturally, the
Appellant is challenging the results because the sample consists of only 14
days within a three-month period. However, no precise and concrete
evidence has been adduced that would justify these results to be discarded or
even altered. Beyond the general protestations and assertions, no minimally
serious evidence, supported by documents, has been adduced that would enable
the Appellant's alcoholic beverage sales to be determined in some other way,
and there is a reason for this: all the employee reports setting out the
details of the sales were destroyed shortly after being created, and the
evidence has shown that the summaries were falsified. The sampling work done by
Ms. Morand covered 14 days within a period of close to three months
because she had nothing else to work with, and, in my opinion, the sample is
sufficiently representative of the products sold and the different selling
prices in the course of that period. The average prices or average markup
percentages, based on the Appellant's own numbers, were then applied to the unchallenged
purchase amounts for each year or part thereof. Even inflation was taken
into account. Ms. Morand's work followed from the Appellant's methods. It
is above reproach, and the results must be accepted in the absence of
persuasive evidence to the contrary. I certainly admit that sampling can only
yield approximate results that do not necessarily reflect fully the true
picture; this is true of any alternative or indirect method that the tax
authorities use when a taxpayer's affairs, or a taxpayer's documents or lack
thereof, require the authorities to use such a method.
[153] Ms. Morand's
reconstruction of the meal or food sales raises another kind of problem. First
of all, she obtained no bills of sale and no detailed daily sales reports from
the Squirrel system for specific days, even though she had requested these
documents (Exhibits I‑14, I‑15, I‑17, and I‑18). She
testified that she obtained only 26 daily reports for the period of
August 6 to August 31, 1996, and those reports only set out the
dollar value of sales by general category, as explained above (Exhibit I‑19).
The Appellant's witnesses alleged that all of the daily Squirrel reports were
submitted to Ms. Morand and were in boxes of documents that Michel Légaré
brought to Mr. Richard's accounting firm. Although these documents
were seized on April 12, 2000, and returned to the Appellant after
two and a half years, no additional report was offered in evidence. As I
have explained, these Squirrel system reports do not provide any details
regarding the transactions; they merely provide a summary of the sales broken
down by general category. Since she was unable to determine what was sold and
for what price, as she had done in relation to the alcoholic beverages thanks
to the daily employee reports that she managed to obtain for the period from
November 7, 1998, to January 31, 1999, Ms. Morand decided
that in order to reconstruct the food sales, she would apply a 200% markup to
purchases, minus 5% for losses. She testified that this was the minimum markup
that she and her team of auditors, as well as other teams of auditors specializing
in the restaurant industry, applied when a taxpayer had deficient accounting or
did not keep all the documents that would make a direct audit possible, as
opposed to an alternative or indirect method.
[154] No evidence was
adduced on behalf of the Respondent that the markup percentage applied by Ms. Morand
constitutes a recognized standard that is reasonably applicable to a restaurant
business of the same kind as the Appellant's, namely a high‑volume pub
that relies on low food prices to attract customers.
[155] It is true that Ms. Morand
verified some easily determinable item prices in order to ensure that the
markup that was used did not penalize the Appellant. However, in doing so,
she used only the one menu that she obtained upon her first visit to the pub, a
menu that states only the normal or regular prices (Exhibit I‑10). While
Mr. Michel Légaré's testimony did not provide clarifications or
concrete numbers concerning his gross profit margin in light of the many food price
reductions and promotions that he referred to (Exhibits A-23 and A-24), the
fact remains that one cannot totally disregard this aspect of the business,
which Ms. Morand says that she was not told about. It seems clear that Ms. Morand's
main objective was to obtain documents, and not to get information about the
special aspects of the business's operations. There is no denying that she
focussed her efforts on documents that were obtained without speaking with Raymond
and Michel Légaré, who could have told her more about certain aspects of
the operations of the business from a commercial standpoint. Indeed, she said
that she did not meet with Michel Légaré, and that she met with
Raymond Légaré a single time after starting her auditing work at Mr. Richard's
office. Based on the evidence as a whole, I find that the testimony of Ms. Morand
and Michel Légaré, and Exhibits A-23 and A-24, were the most serious
indicators that the overall position of the business was not fully taken into
account.
[156] Ms. Morand also
said that the numbers obtained by applying a 200% markup less 5% for losses
were close to the numbers that the Appellant entered for the period from
May 1, 1998, to January 31, 1999. It is true that the
difference for this period is only $18,000. However, the difference is so
enormous for the four previous years that one would have to conclude that the
Appellant reported less than 40% of its food sales for the years that ended
April 30, 1995, and April 30, 1996. Such results seem hardly
plausible.
[157] The extrapolation of
the total food sales based on the 26 daily Squirrel system statements from
August 1996 to determine the total sales for the year is another exercise
that I do not think is so conclusive that it must be accepted from the outset
because the extrapolation led to a higher number (Exhibits I‑19 and I‑20).
It does not show that the 200% markup, less 5% for losses, was an objective and
reasonable standard that takes account of the overall position of the
Appellant's business for the entire period covered by the assessment. Indeed,
the extrapolation is very different from the method that Ms. Morand used
to determine the alcoholic beverage sales, and, in any event, the results of
the extrapolation were not used.
[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. In
income tax cases where a taxpayer is assessed by means of the indirect net
worth method, and, for lack of anything better, his personal expenses are
determined by means of assumptions, this is done by using minimum objective standards
drawn from official statistics published by Statistics Canada with respect to
the cost of living for individuals and households in different parts of the
country, not by relying on numbers that stem from the auditor's impressions. In
my opinion, this approach is also applicable to GST cases. In summary, the
assertion that "my team and I apply a markup of at least 200%, less 5% for
losses" is not sufficient to shift to the taxpayer the full burden of rebutting
this assumption where there are serious doubts about it. A minimum amount of
evidence is required in order to determine that such a markup is recognized,
reliable and reasonably applicable under the circumstances.
[159] In Hickman Motors
Ltd. v. Canada, [1997] 2 S.C.R. 336, L'Heureux‑Dubé J. of
the Supreme Court of Canada addressed the burden of proof in tax cases in the
following terms, at paragraphs 92 and 93 of her decision:
92 It
is trite law that in taxation the standard of proof is the civil balance of
probabilities: Dobieco Ltd. v. Minister of National Revenue,
[1966] S.C.R. 95, and that within balance of probabilities, there can
be varying degrees of proof required in order to discharge the onus, depending
on the subject matter: Continental Insurance Co. v. Dalton Cartage Co.,
[1982] 1 S.C.R. 164; Pallan v. M.N.R., 90 D.T.C. 1102 (T.C.C.), at
p. 1106. The Minister, in making assessments, proceeds on assumptions (Bayridge
Estates Ltd. v. M.N.R., 59 D.T.C. 1098 (Ex. Ct.), at p. 1101) and the
initial onus is on the taxpayer to “demolish” the Minister’s assumptions in the
assessment (Johnston v. Minister of National Revenue, [1948] S.C.R.
486; Kennedy v. M.N.R., 73 D.T.C. 5359 (F.C.A.), at p.
5361). The initial burden is only to "demolish" the exact
assumptions made by the Minister but no more: First Fund Genesis Corp. v.
The Queen, 90 D.T.C. 6337 (F.C.T.D.), at p. 6340.
93 This
initial onus of "demolishing" the Minister’s exact assumptions is
met where the appellant makes out at least a prima facie case:
Kamin v. M.N.R., 93 D.T.C. 62 (T.C.C.); Goodwin v.
M.N.R., 82 D.T.C. 1679 (T.R.B.). . . .
[160] At paragraph 96
of the decision, L'Heureux‑Dubé J. cited with approval the following
comment made by Brulé J. of the Tax Court of Canada in Kamin v. M.N.R.,
93 DTC 62, at page 64:
The Minister does
not have a carte blanche in terms of setting out any assumption which
suits his convenience. On being challenged by evidence in chief he must be
expected to present something more concrete than a simple assumption.
[Emphasis
in the decision.]
[161] In my opinion, the
Appellant has adduced prima facie evidence that the 200% markup applied
to the overall food purchases cannot adequately have reflected the total dollar
amount of sales for the entire period covered by the assessment. In my opinion,
the elements referred to in paragraph 155 of these reasons are sufficient
in this regard. Under the circumstances, the Respondent needed to make a more
convincing case that the assumption utilized was, on a balance of
probabilities, the standard that most adequately reflected the dollar amount of
the Appellant's meal sales during the period in issue, and this was not done.
[162] Thus, as far as the meal
sales are concerned, it is my opinion that the assessment must be limited to
the sales set out in the Appellant's financial statements for the fiscal years
from May 1, 1994, to April 30, 1998, and in the general ledger
for the period from May 1, 1998, to January 31, 1999.
[163] The evidence has
revealed that not all the cover charges imposed by the Appellant were reported.
Examples of this can be found in the weekly reports completed by Raymond Légaré
(Exhibit I‑28, at pages 31 to 38). Although the Appellant
collected cover charges on a regular basis commencing with the fiscal year that
began on May 1, 1995, there are no cover charges in some of the
weekly summaries offered in evidence, and in other such summaries, an identical
amount of $2,000 is stated for several weeks. Other documents show that the
cover charges amounted to $2,880 and $2,790 for two specific days (Exhibit I‑11,
at pages 7.162 and 7.164). Ms. Morand reconstructed the cover charges by
determining the ratio of the reconstructed alcoholic beverage and meal sales to
the amounts reported in the Appellant's financial statements or books for these
two items and by determining the share that the cover charges represented in
relation to these other two elements (Exhibit I‑25, at page 29,
Exhibit I‑26, at page 30, Exhibit I‑27, at page 29,
and Exhibit I‑28, at page 30). The Appellant did not
expressly challenge this method for increasing the cover charges.
However, the method was contested implicitly as part of the Appellant's
challenge against the reconstructed alcoholic beverage and meal sales. Since
the amount of meal sales was limited to the amount reported in the Appellant's financial
statements or general ledger, the reconstructed cover charges must be reduced
using the same formula that was used to make the assessment in issue.
[164] In addition to the
penalty and interest under subsection 280(1) of the Act, the assessment in
issue includes a penalty under section 285 of the Act. Section 285 is
similar to subsection 163(2) of the Income Tax Act and
applies to false statements or omissions made knowingly or under circumstances
amounting to gross negligence. The Courts have frequently addressed the level
of negligence that triggers these provisions. The remarks by Marceau J. (as he
then was) in Cloutier v. The Queen, 78 DTC 6485 are among the most
frequently cited ones. At page 6487, he stated:
The question before the Court is
whether the circumstances in which the omission occurred are such that gross
negligence may be attributed to the taxpayer: "gross negligence"
being taken to mean a relatively serious act of negligence, which is difficult
to explain and socially inadmissible.
[165] In Venne v.
Canada, [1984] F.C.J. No. 314 (QL), 84 DTC 6247, at page 6256,
Strayer J. dealt with the concept of gross negligence in the following terms:
. . . "Gross negligence" must be taken to
involve greater neglect than simply a failure to use reasonable care. It must
involve a high degree of negligence tantamount to intentional acting, an
indifference as to whether the law is complied with or not.
[166] Mistakes, bungling,
and incorrect accounting charges were cited frequently in the case at bar. However,
the evidence reveals something else. First of all, the Appellant's GST returns
do not report all the tax collected. The ever‑growing gap between
the tax reported and remitted, and the tax entered in the books or financial
statements, was acknowledged by the accountant Mr. Richard, who said that
he had discussed it with Raymond Légaré. Yet nothing was done to correct
the situation, which lasted throughout the period covered by the audit, and
resulted in an aggregate GST discrepancy of $84,524.02. Thus, the Appellant
failed to report and remit GST in respect of $1,207,486 in sales on time for
more than five and a half years. The repeated omissions each quarter, and the
false statements in the returns that the Appellant was required to submit, were
made knowingly, or, at the very least, under circumstances amounting to gross
negligence, and that is exactly what section 285 is intended to penalize.
[167] Another form of
conduct for which the Appellant and Raymond Légaré can certainly be
criticized is the systematic destruction of the employees' daily reports
concerning the sales of alcoholic beverages. Since these were the only
documents with which sales could be directly verified, it seems obvious that
they should have been kept. However, it was only after a second request by
Ms. Morand that they started to be kept. This is why Ms. Morand was
able to obtain such reports only for a period slightly shorter than three
months, and she used those reports as the basis of her sampling and analysis.
[168] This issue brings me
to the summaries which Raymond Légaré filled out and which Mr. Richard used
to do the Appellant's accounting. I am referring to documents such as Exhibits A‑3
and A‑4, on which identical sales amounts are entered up for five
categories of alcoholic beverage. Ms. Morand offered other examples of similar
documents (Exhibit I‑28, at pages 31 to 38). Some contain round
numbers such as $1,500, $2,000, $2,500 and $3,500 for the sales of several
categories of alcoholic beverage. Moreover, some of the weekly reports state
$2,000 in cover charges. Others state no amount. The only conclusion that can
be drawn from an examination of these summaries or weekly reports is that the
Appellant's income was clearly not reported in full, that these documents are
false, and, above all, that they are the product of deliberate acts that could
only result in false statements. Marc Bélanger, the Appellant's expert, himself
acknowledged that one cannot have identical reports for two different periods.
[169] The expenses paid in
cash, including the SAQ purchases identified by Ms. Morand, are another consideration
tied to unreported sales. Furthermore, the evidence reveals that some
employees' wages were paid out of income that was not on the books, and points
to other expenses paid for in cash (Exhibits I‑11 and I‑12).
[170] According to the
estimate made by the Appellant's expert, an estimate that I find very
cursory, the Appellant failed to report $389,473 in sales for the years 1995 to
1998 (Exhibit A‑28, at page 6). First of all, as I have said
earlier, this estimate does not take into account the nine‑month period
from May 1, 1998, to January 31, 1999. In addition, the
expert's estimate of the expenses paid for in cash, other than the purchases
from the SAQ, is not supported by analysis or evidence of any kind whatsoever.
The same thing can be said about his estimate of Michel Légaré's withdrawals
during the years 1995 to 1998, which were reduced from $240,000 in his initial
assessment, to only $24,599, without any detailed analysis that could account
for such a major change.
[171] In my opinion, the
evidence adduced by the Respondent is sufficient to enable me to uphold not
only the penalty set out in paragraph 280(1)(a), but also the penalty
set out in section 285 of the Act. However, the penalties and interest
must be adjusted in accordance with the reduction of the Appellant's sales for
the period covered by the assessment, that is to say, from
May 1, 1994, to January 31, 1999.
[172] In light of the
foregoing, the appeal is allowed, without costs, and the assessment is referred
back to the Minister for reconsideration and reassessment on the basis that
(1) the
Appellant's meal sales amounts must be limited to the amounts entered in the
financial statements for the fiscal years from May 1, 1994, to
April 30, 1998, and in the general ledger for the period from May 1, 1998, to
January 31, 1999;
(2) the
cover charge amounts must be reduced as per the reduction of the meal sales
amounts using the same formula that was used to make the assessment under
appeal; and
(3) the
penalties and interest must be adjusted as per the reduction of the meal sales
and cover charge amounts.
Signed at Ottawa, Canada, this 19th day of October 2006.
"P.R. Dussault"
Translation
certified true
on this 19th day
of February 2008.
François Brunet,
Revisor
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